Spain’s borrowing costs have shattered euro-era records. The yield on 10-year bonds hit 7 percent on Thursday morning. The move comes after ratings agency Moody’s cut Spain’s credit rating to one notch above “junk”.
The downgrade came with a warning the country’s rating could be reduced further in the next three months and face the risk of a full-blown bailout.
The debt yield has peaked and troughed since the start of the year. Seven per cent is seen as too expensive by markets for a sovereign to borrow over the long term.
It is the highest since the birth of the single currency in 1999.
“The markets will probably start to think that Spain has received the bailout however it’s framed. And you know when they lose confidence; we all know what happens to bond yields. I think in the current environment, as pressure on Southern European yields will continue to rise, it clearly raises pressure on the ECB to take further action and to buy bonds in the secondary market,” said Peter Dixon, Global Financial Economist at Commerzbank.
The ECB pumped more than one trillion euros in cheap loans into the European banking system in two operations in December and February seeking to avert a dangerous credit squeeze.
The Spanish crisis is unfolding against the backdrop of Sunday’s Greek elections further destabilising markets.