N’S finance minister flew to London for emergency talks with bondholders yesterday as debt markets grew fearful over the country’s ability to finance itself.
Elena Salgado met with fixed income houses, thought to include M&G and Standard Life, to reiterate the Spanish government’s promise to severely rein in its budget deficit to three per cent of GDP by 2013.
Even as she spoke, the cost of insuring against Madrid’s gilts through credit default swaps soared to a record 172.5 basis points. This means it would cost $172,500 to insure $10m of Spanish government debt against default for five years.
The euro languished at around $1.37 as investors aggressively shorted the currency, spooked by the prospect of a sovereign debt crisis prompted by Greece’s teetering finances. Traders and hedge funds had amassed $7.6bn (£6.7bn) in short positions by the start of February, the largest bet against the euro in its history.
The Spanish government pledged to cut its net borrowing by 34 per cent in 2010 to €76.8bn. Ministers launched a publicity offensive, declaring Spanish bonds were suffering from “contagion” due to the poor performance of Greece’s recent issue and attacking speculators for undermining confidence in the country’s economy.
Public works secretary José Blanco lashed out at the media in a radio interview. He said: “Nothing that is happening in the world, including the editorials of foreign newspapers, is casual or innocent.”
The eurozone’s other straggling members fared just as badly, however. The spread on Portuguese credit default swaps rose to 243 basis points, its widest-ever level, while the price of insuring against Greek default hit 420 basis points.
Analysts warned the region would be sent into a fresh tailspin if Greece fails to fully cover its next bond issue. Athens was likened to Lehman Brothers for its potential to drag the entire system back towards calamity if it were to collapse.
Gary Jenkins, head of fixed income research at Evolution Securities, said: “In terms of issuing gilts, there are only so many times you can go to the well before people look around and say, ‘there’s no price for this’. We are probably an issue away from finding out if that’s the case with Greece.”
Sterling was caught up in the worries, falling to an eight-month low against the dollar as investors fled to safety. The pound picked up slightly to close at $1.564.
Meanwhile, in the US the Dow Jones Industrial Average dropped below the 10,000 mark for the first time in three months to close at 9,908.39, with banks taking damage.