A slide in Spanish stocks and bonds deepened as investors’ concerns that prime minister Mariano Rajoy may require international aid rattled markets. Spain, the euro region’s fourth-largest economy, is in “extreme difficulty,” Rajoy said yesterday, raising the likelihood of a bailout for the second time this week. The Ibex stock index slid 0.7 per cent in Madrid on Friday. The benchmark Stoxx Europe 600 Index extended its biggest retreat in four weeks and the MSCI Emerging Markets Index slipped 0.3 per cent to 1,034.65 as of 3:14 pm in Madrid.
A rally triggered by more than $1 trillion of European Central Bank loans to the region’s financial institutions to stave off a credit crunch is running out of steam and, while Italian prime minister Mario Monti is pressing ahead with an economic overhaul, Rajoy is failing to meet deficit targets amid a worsening recession.“Stress has returned to the periphery of the euro area,” David Mackie, chief European economist at JPMorgan Chase Inc, wrote in a note on Friday.
Spanish bonds fell on Friday, pushing the yield on the 10-year benchmark bond to the highest since December 12 at 5.79 per cent, and widening the spread with similar-maturity German bunds to more than four percentage points.
The yield on Spain’s 10-year benchmark bond has jumped nearly one percentage point since March 2, when Rajoy announced the government would miss its budget-deficit target this year. He set the target for 2012 at 5.3 per cent of gross domestic product — lowering it from 5.8 per cent under European Union pressure — instead of 4.4 per cent and warned public debt will surge to a record 79.8 per cent of GDP as it imposes the deepest austerity in at least three decades.
The concern about Spain also led to a slump in Italian bonds, even as Monti moved to eliminate the budget deficit next year and revamp the economy. The yield on Italy’s benchmark 10-year bond rose 13 basis points to 5.50 per cent, the highest since February 23.
‘Closer scrutiny’
Italy’s borrowing costs have fallen lower than Spain’s since March as concerns about the latter’s solvency became greater. One of Monti’s moves to increase confidence in country’s economy has been to present an overhaul of labour-market rules, cited by economists as one of the reasons why Italy’s economic growth has lagged behind the European Union average for more than a decade.
“Spain will remain under closer scrutiny,” Janet Henry, chief European economist at HSBC Holdings Plc, wrote in a report on Friday. “The concerns about the financial system are unlikely to abate, in which case the markets will continue to question whether or not Spain too could also find itself in need of financial assistance.”
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The ECB yesterday waived an exit from emergency stimulus measures after Spain barely covered the minimum amount targeted at an auction. ECB President Mario Draghi wants governments to deliver on promised structural reforms and fiscal consolidation before the impact of measures wears off.
Credit-default swaps insuring Spanish bonds have surged 21 percent since the start of the year to 461 basis points, according to CMA, signaling investors bet its government may be the fourth in the euro region to request a rescue. That compares with a 1 percent decline in swaps on Portugal, the next worst- performing nation, and more than 40 percent drops for Norway, Sweden and the U.S.