Worries over Spain grow as bond yields rise

Associated Press SHARE

By DANIEL WOOLLS, Associated Press

MADRID (AP) — Worries about Spain's finances intensified Tuesday as the country's cost of borrowing on international markets rose despite expectations of a new round of austerity measures.

The yield — the interest rate a country has to pay to raise money on the international debt markets and an indication of risk — on 10-year Spanish bonds in the secondary market closed on a high of 5.93 percent, up 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 4.29 percentage points, the highest since the new government took power in December.

Spain's main stock index, the Ibex 35, shed almost 3 percent, to drop below 7,500 points, the lowest since March 2009 when the crisis began hitting Spain head on.

The market pressure was due both to wariness over Spain's ability to cut its national debt levels 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.

The government announced Monday 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 said.

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 gross domestic product 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 yet 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 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.

Speaking in the Spanish Senate, Prime Minister Mariano Rajoy defended his reforms and highlighted the necessity for all the country's powers to work hard to cut the deficit.

"It's important that we must all make an effort to reduce the public deficit, the national government, naturally, but also the semiautonomous regions," said Rajoy. "Because there's no doubt that much of Spain's future is at stake and also economic growth and the creation of jobs over the coming years."

But Bank of Spain Governor Miguel Angel Fernandez Ordonez warned Tuesday that a strong recovery was unlikely in the short-term and the reforms undertaken so far by the government were insufficient and more needed to be done.

Fernandez Ordonez added that unless the economy improved, Spanish banks — which are heavily exposed to a burst real estate bubble — will need more capital.

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.

___

Ciaran Giles in Madrid and Gabriele Steinhauser in Brussels contributed to this report.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.