Fears of Spain bailout plunge the eurozone back into crisis
SPAIN plunged deeper into crisis yesterday amid mounting fears that it will need an emergency bailout to save it from financial ruin.
Borrowing costs soared and the cost of insuring Spanish debt against default hit a record high as investors fretted about the health of the economy and banking system.
The bleak start to the week sparked warnings that Spain will be the fourth eurozone country to need a bailout following the rescues of Greece, Ireland and Portugal.
A report by the International Monetary Fund is today expected to warn that the eurozone faces recession this year with Spain and Italy among those economies worst hit.
‘We’re back in full crisis mode,’ said Lyn Graham-taylor, a strategist at banking giant Rabobank. ‘It is looking more and more likely that Spain is going to have some form of bailout.’
Spain is suffering from a deep economic slump following a spectacular and bruising crash in its property market. Unemployment is the highest in Europe with a record 4.75million out of work. Half of Spanish youngsters do not have a job.
The government is battling to cut the crippling deficit and has embarked on one of the toughest austerity programmes in Europe. Economy minister Luis de Guindos yesterday conceded the country was back in recession.
He said the first three months of 2012 followed ‘a similar pattern to the last quarter of last year’ when output fell 0.3 per cent – resulting in two consecutive quarters of decline.
Spanish ten-year bond yields – the interest the government pays to borrow money – jumped above 6 per cent for the first time this year to 6.17 per cent. That put Madrid back in the danger zone with yields worryingly close to the 7 per cent level which triggered emergency bailouts in other countries.
Borrowing costs in Spain are now higher than in December when the European Central Bank flooded the eurozone banking system with cheap funds in a desperate attempt to prevent another credit crunch and ease pressure on countries such as Italy and Spain. ‘This artificial high from the ECB drugs has worn off and now we’re basically back to where we started,’ said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe.
‘After three months that were calmer than expected, the euro crisis is back,’ said Holger Schmieding, chief economist at Berenberg Bank in London.
Rupert Osbourne, a dealer at the City trading firm IG Index, said: ‘If we have learnt one thing from the past couple of years of European debt, it is that these problems tend not to be resolved quickly and painlessly – and it does set the stage for potentially more volatility in the weeks ahead.’