Lenders pay to lend to Germany as Spain back above key barrier

Ben Southwood
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SPANISH bond yields broke through the psychologically significant seven per cent barrier yesterday, on renewed doubts surrounding the Euro crisis.

Ten-year yields rose nine basis points to 7.07 per cent, while in Italy yields rose eight basis points to 6.11 per cent. Analysts put the incline down to fears that EU politicians would fail to agree on measures to solve the euro crisis, or that national institutions would block their implementation.

“The expectations are quite low, you can see that by the pressure you are seeing on peripheral debt,” said Richard McGuire at Rabobank.

Two-year yields were up 20 basis points for Spain and 30 basis points for Italy – analysts see this flattening of the yield curve as typical of stressful periods.

This comes as two-year German yields went below zero, at -0.03 per cent, and shorter French and Dutch bonds also had negative yields.

High Spanish and Italian yields are believed to come primarily from worries about the implementation and effectiveness of crisis aversion measures.

The German constitutional court will today consider the European Stability Mechanism (ESM) – which may recapitalise ailing Spanish banks directly.

Even if the ESM gets past the court, the rebellion of the smaller party in Angela Merkel’s ruling Union Faction, the Christian Social Union of Bavaria, makes a parliamentary rebellion possible.

Dutch and Finnish leaders have demanded that even if ESM directly intervenes in Spanish banking, Spain’s government must be to some extent liable for the loans made.