Rajoy’s inaction pushes Spanish yields up to 6pc

Ben Southwood
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SPANISH bond yields began to rise again yesterday, from the low they hit following European Central Bank (ECB) president Mario Draghi’s speech 12 days ago committing the Bank to sovereign bond-buying.

In the wake of his speech the euro rose four per cent on the dollar and 10-year yields on Italian and Spanish bond yields fell more than a percentage point.

But the optimism that appeared due to the promise of ECB intervention has begun to dissipate. Spanish 10-year bonds, yielding as little as 5.6 per cent last Friday, hit yields of six per cent yesterday, as markets wondered if Spanish Prime Minister Mariano Rajoy would request aid.

Spain would need to request help for the ECB to step in and buy its bonds, bringing with it tough conditions imposed by the so-called troika, made up of IMF, EU and ECB officials.

And German support for sovereign bond buying was bought with a promise to extract strict austerity commitments from recipients – but Rajoy is reluctant to impose further cuts on a resistant Spanish public.

But even the recent rise puts yields well below recent peaks of 7.5 per cent, suggesting Rajoy might prefer not to ask for a bailout at all – if the worst is really over. “The market is pondering whether or when Spain might require a bailout,” said Rabobank rate strategist Richard McGuire, “The realisation is dawning it might not be rushing.”

Hourly labour cost data was a nugget of positive news for the Eurozone yesterday, with slow wage growth in crisis-hit economies helping to achieve some much needed rebalancing in competitiveness.

The Eurozone as a whole saw total hourly labour costs grow 1.6 per cent between the first and second quarters, but unemployment-ravaged Spain saw growth of just 0.5 per cent, while Italy’s figure was also below the average at 1.1 per cent. On the other hand Finland, Belgium, Germany and France all saw above-average growth.

Yesterday also saw an announcement by Pierre Moscovici, the French finance minister, who said that France and UK agree on ECB bank supervision. This was the other measure revealed by Mario Draghi on 6 September.