MADRID — Worries about Spain's finances intensified Tuesday as the country's bond yields on international markets rose despite expectations of a new round of austerity measures.
The yield on 10-year Spanish bonds in the secondary market rose as high as 5.93 percent from 5.74 percent when the Easter break began late last week. The difference between Spain's yield and that of the benchmark German bund reached 4.25 percentage points, the highest since the new government took power in December.
The increase was due both to wariness over Spain's ability to cut debt as well as a drop of confidence in wider global financial markets following weak U.S. economic data on Friday. When international investors are concerned about global growth, they pull back from risky assets, such as Spanish government bonds.
Spain is under intense pressure to show it can rekindle economic growth and cut its budget deficit to avoid becoming the next eurozone country to need a bailout. The unemployment rate is nearly 23 percent and the economy is back in recession — the Bank of Spain predicts it will contract 1.7 percent this year.
On Monday evening, the government announced another €10 billion ($13 billion) in savings on education and health spending as well as an accelerated program to sell off companies in which the state holds majority stakes.
Economy Minister Luis de Guindos insisted market volatility and rising bond spreads would not cause the government to "veer off course" in its reforms.
"The government knows how to get through the current difficult situation," he told a breakfast gathering of business leaders.
De Guindos estimated the economy would contract in the first quarter at a similar rate as in the fourth quarter of last year, 0.3 percent.
That will make it all the more difficult for the new center-right government to honor its promise to reduce the budget deficit from 8.5 percent of GDP last year to 5.3 percent this year and 3 percent in 2013.
To boost confidence in its finances, the government last month unveiled an austerity budget with €27 billion in tax hikes and spending cuts this year. The blueprint has to make its way through parliament and is not expected to be passed until June.
Finance Minister Cristobal Montoro said one of the goals of the new savings measures announced this week is to crack down on what he called 'abuses' in the health care system, such as other Europeans visiting Spain to use its health care services or subsidized prescription medicine.
He told Spanish National Radio the reform of the health care system would be ready in two weeks. It has to be discussed with the 17 semiautonomous regions, which receive money from the central government but have jurisdiction over how health and education money are spent.
European Commission spokesman Olivier Bailly said the EU's executive arm and budget watchdog viewed "favorably" both the measures announced Monday and the overall Spanish budget.
However, he said that for a full analysis of the draft budget submitted last week, the Commission needs more information on the finances of Spain's regions and details of the health care reform. Those are expected by the end of the month.
Meanwhile, Bank of Spain Governor Miguel Angel Fernandez Ordonez warned in a speech Tuesday that the reforms undertaken so far by the government were insufficient and more needed to be done.Comment on this story
Ordonez said that unless the economy improved, Spanish banks — which are heavily exposed to a burst real estate bubble — will need more capital. Fernandez Ordonez said a strong recovery was unlikely in the short term.
The government has already instituted a reform that will require banks to come up with an estimated €50 billion ($65 billion) in provisions to cover real estate holdings, many of them overvalued.
Spain's main stock index, the Ibex 35, was shedding 1.45 percent in early afternoon trading after suffering sharper losses on the open.
Ciaran Giles in Madrid and Gabriele Steinhauser in Brussels contributed to this report.