Europe debt fears pile pressure on Spain, others

By Ciaran Giles

Associated Press

Published: Tuesday, Nov. 30 2010 10:24 p.m. MST

A broker walks past the main electronic displays Tuesday at the stock exchange in Madrid, Spain.

Associated Press

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MADRID — Europe's debt crisis cast its gloom over larger countries like Spain on Tuesday as investors sold off government bonds on worries that the common currency region will be strained by more expensive bailouts.

The yields on Spain's 10-year bonds jumped as high as 5.7 percent — a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond — before easing to 5.5 percent on the close.

The spread on Italy's equivalent bond also reached the highest since the 1999 launch of the euro, before falling back somewhat. Portugal's bond yields, which soared last week, eased slightly but remained near record highs of 7 percent.

"Ireland's bailout package has clearly failed to stop the rot in the eurozone markets and if anything it has focused attention on other countries in the periphery," said Mitul Kotecha, analyst at Credit Agricole CIB.

The continued market turmoil "will come as a bitter blow to European officials who had hoped that it would help to turn sentiment around," he said.

Jose Manuel Campo, economy secretary at the Spanish finance ministry, sought to ease tensions and described the market reaction as "disproportionate."

"It's not necessarily worrying," he told a parliamentary commission but added that it would be of concern if it continued for some time as it would then make loans to the public more expensive.

He said investors' lack of confidence "is poorly justified and based on a short term analysis," pointing out that there were major differences between Spain and Greece, Ireland or Portugal.

Spain and Portugal, deemed the next weakest links in the eurozone economy, have continually denied they will need outside help but investors have become increasingly skeptical that the series of bailouts will stop.

At the heart of the problem is that the austerity measures these countries need to take to reduce their deficits threaten to backfire by weakening economic growth and hurting state revenues. That is what's happening in Greece, which has been able to drastically cut its spending but is struggling to raise tax income as economic and corporate activity wilts.

"It is clear that the market is aware of the tightrope that 'peripheral' governments are walking," said Neil Mellor, currency strategist at Bank of New York Mellon.

Portugal's central bank warned Tuesday that the financial system is facing "serious challenges," as foreign concerns about public, private and corporate debt have made it harder for Portuguese banks to raise money on international markets.

Continuing to request financing from the European Central Bank is "unsustainable," the bank warned, saying banks should adopt a commercial policy of encouraging saving to ensure their liquidity.

While rescuing Portugal would be about as costly as Greece or Ireland, who each represent less than 2 percent of the eurozone economy, a Spanish bailout would test the limits of Europe's finances. It accounts for over a tenth of the eurozone economy, and Italy is even larger.

Spanish Prime Minister Jose Luis Rodriguez Zapatero has vigorously defended the nation's economy and finances. He blames the bond market problems on speculators looking to make money on Spain in the short term and said they would be proven wrong.

But former Spanish premier Felipe Gonzalez, who chairs an EU Reflection Group that analyzes the bloc's future, felt the ECB could help by boosting money into the economy the way the Federal Reserve does.

He warned that if Europe did not get ahead of the markets, the cases of Ireland and Greece would be repeated and in the end the entire 27-nation group would be contaminated.

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