Greece and Spain spark Euro fear

Tim Wallace
Follow Tim
THE SPANISH government’s borrowing costs shot to a euro-era high yesterday as another regional authority requested a bailout, panicking already nervous investors who now fear a full rescue might be needed to try to help the country out of its debt troubles.

It came as EU officials warned Greece could also need another bailout, meaning the European Central Bank and International Monetary Fund could lose the cash they pumped in earlier this year – an eventuality they previously said would never happen.

The single currency’s plight was highlighted late last night as Moody’s shifted the European Financial Stability Facility bailout fund from a stable to a negative outlook, after a similar knock to Germany on Monday.

Yesterday, Italian stocks plunged to their lowest level since the euro was created, as investors feared it could also need a bailout if its situation does not improve soon.

And influential survey data indicated the Eurozone’s private sector output fell in July, raising expectations of a recession as JP Morgan slashed its forecast to predict a 0.5 per cent contraction in GDP in the fourth quarter.

Catalonia’s regional government will apply for aid from the Spanish government, its finance minister said yesterday, as it cannot access debt markets.

It follows Valencia, which called for assistance on Friday, seeking to tap the central government’s €18bn (£14bn) bailout fund for regional authorities.

But Spain’s government is already under enormous strain dealing with its own debts, and had to arrange a €100bn Eurozone rescue plan for the banks as it cannot bail them out itself.

Yields on its 10-year bonds rose to new highs of 7.636 per cent yesterday, and a €3bn auction of three- and six-month debt saw six-month yields rise to 3.691 per cent, up from 3.237 per cent last month.

“A bailout is looking more likely by the day,” warned Jonathan Loynes of Capital Economics. “That would significantly deplete the resources of the bailout funds and leave little in the pot to provide further assistance to Portugal and Ireland and, more crucially, to deal with problems in Italy.”

Yields on Italian 10-year bonds also jumped 0.26 percentage points to 6.597 per cent, while the stock market dropped another 2.71 per cent, hitting a euro-era low in the course of the day.

Meanwhile EU sources told Reuters that Greece could need to restructure its debt again – just four months after the country’s last bailout.

Troika officials are in the country ahead of European Commission president Jose Manuel Barroso’s visit tomorrow, and have found government finances far worse than hoped – in part because they now expect GDP to fall seven per cent this year, not the five per cent previously believed.

Meanwhile Standard & Poor’s downgraded the subordinated debt of several European banks as it believes the creditors will not receive any help in the event of a bailout, under new EC draft bank resolution plans.