Spain, Italy edge closer to eurozone crisis
Bailout likely as economies fall back
Spain and Italy faced growing market pressure Monday, stoking fears of a new phase in the eurozone debt crisis as Madrid’s budget problems threatened to drag in other southern European economies.
Yields on Spanish 10-year bonds have climbed over 6.1 per cent, nearing levels that caused general market panic when Italy was in the same position late last year.
Italian 10-year yields stood at almost 5.6 per cent, while the yield on safehaven German Bunds was just over 1.6 per cent, the lowest since the height of the financial turmoil in 2008.
“We are back in full crisis mode,” said Rabobank strategist Lyn GrahamTaylor.
Spain, the eurozone’s fourth-largest economy, is at the centre of the crisis as concerns grow about some of its banks and the effect of the austerity policies of Prime Minister Mariano Rajoy’s conservative government on a struggling economy.
As the psychological boost from huge injections of cheap cash by the European Central Bank this year has faded and the sustainability of Spanish public finances is questioned, the eurozone has been thrust back on to the agenda of International Monetary Fund meetings this week.
Madrid said it would have to impose further cuts on regional governments, some of which have failed to pay contractors’ bills for months, and acknowledged that the economy had tipped back into its second recession since 2009.
“It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing,” Graham-taylor said.
The ECB has intervened sporadically since flooding the market with funds in February and is reluctant to resume bond purchases. Governing Council member Klaas Knot said on Friday he hoped the bank never has to use the program again.
In an interview with the daily El Mundo, Economy Minister Luis de Guindos said first-quarter growth figures, due on April 30, would show a similar pattern to the last quarter of 2011, when the economy contracted 0.3 per cent, but would not be worse.
“If you had asked me two months ago, I would have expected the first quarter of 2012 to be much worse than the last quarter of 2011. But that is not going to be the case,” he said.
In Rome, new Italian growth forecasts, which had been expected on Monday were delayed until Wednesday, but a similarly bleak picture is expected when they are announced.
On Monday, the undersecretary of the Italian economy ministry, Gianfranco Polillo, said Rome was set to lower the forecast for 2012 output, which predicts a 0.4 per cent contraction for the eurozone’s third-biggest economy.
But he said the new forecast would probably come in better than the European Commission’s forecast of a 1.3 per cent contraction.
The market tensions have caused growing friction between the two countries and Italian Prime Minister Mario Monti was forced to phone Rajoy last week to try to soothe his anger at comments from Italy blaming the turmoil on Madrid.