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The cost of Spanish borrowing reaches record heights as European markets suffer sell-offs

The yields for Spanish 10 year bonds are well over 6% while economic growth remains slow

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05 August 2011 07:08 PM

by

Caitlin Smith

Barcelona (CNA).- The yields for Spanish 10 year bonds hit a fresh high on Friday, at over 6% contributing to the global market sell off. Economic growth remains slow with GDP only increasing by 0.3% last quarter according to the Spanish Central Bank. The financial situation in Italy is also troubling with the cost of the Italian debt outstripping Spain. Although the Spanish government was able to keep the demand of investors, selling bonds totalling 3.3bn euros, the rate of interest on 2.2bn euros worth of debt has risen by approximately 0.4%. This increase in the cost of borrowing and the lack of healthy economic growth will prevent Spain from successfully reducing its deficit.


The financial situation of the Spanish state continues to look poor, as Europe suffers market drops and record sell-offs. On Friday 10 year bonds reached a record level of over 6% a worryingly high level. Despite austerity measures being taken, economic growth remains slow, a discouraging sign to the civil population which is suffering from record levels of unemployment. Jose Luis Rodriguez Zapatero has delayed his holiday to manage the situation more carefully. However, Spain is still struggling to retain the confidence of investors and lenders amid increasing doubts over the ability of the state to repay its debts. Analysts say however, that the continued demand for Spanish bonds is one positive which can be taken from the situation. The Central Bank of Spain said that "a vigorous response in national economic policy" was vital in overcoming the situation. It also highlighted that the current economic climate which has been "marked by deterioration in the euro zone debt crisis" necessitated a quick and effective reaction by all European leaders, as continued confusion would not aid recovery. The European Commission President Jose Manuel Barroso has characterised the situation within Spain as "a cause of deep concern" and has communicated to all European members that their "full backing" is needed to ensure the survival and health of the euro zone. Although the European Central Bank has intervened in the euro zone, it continues to only purchase Portuguese and Irish bonds. Within the global economy the US stock market endured one of the worst days in its history despite reaching an agreement on its controversial debt relief plan. The Far East and Asia is also suffering, with Japan's main index down 3.7% and Hong Kong's 4.6% lower according to the BBC. The Bank of Spain has said that its economy is inextricably tied to that of the global market, suggesting that the industry sector is still recovering from a lack of demand following the Japanese earthquake in March. For now, all eyes are on the Italian and Spanish economies. As the third and forth largest European markets, a bail-out could be financial suicide for the euro zone which potentially could cripple under the pressure. With the Spanish elections bought forward to November, it is hoped that political and economic stability will return to the state. However doubts are still lingering as to whether the government can successfully cut its deficit without borrowing even more.

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  • European markets suffer sell-offs (by Reuters)

  • European markets suffer sell-offs (by Reuters)