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Spain crisis: Bond yield hits bailout danger zone

Associated Press Modified: June 18, 2012 at 12:07 pm •  Published: June 18, 2012
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MADRID (AP) — Spain's ability to manage its debt without an international bailout was thrown into doubt Monday after investors pushed its borrowing rates up to the level at which Greece, Portugal and Ireland had sought help.

Investor sentiment improved briefly in the morning as electoral results in Greece suggested the country would not drop out of the euro currency union, a scenario that would have put severe stress on Spain's markets.

But that market relief quickly transformed into concern in Madrid as it became clear that Spain's fundamental economic and fiscal problems remain huge.

The interest rate on Spain's 10-year bonds — an indicator of market confidence in how well a country can pay down its debt —hit a fresh eurozone era high of 7.18 percent before easing in the afternoon and closing at 7.12 percent. It is the first time since Spain joined the eurozone that it ended above 7 percent. Stocks plunged 3 percent on Madrid's main index.

The bond yield's alarming quarter percentage-point rise put it firmly in the range that prompted the other three eurozone countries to ask for a bailout.

The yield indicates at what rate a government can raise money from financial markets when it holds bond auctions. While Spain would be able to afford the current high rates for a few weeks at least, it would find them too expensive in the longer term. If the bond rates do not fall back down, Spain may have to ask for foreign aid to finance itself.

Andrew Wilkinson, chief economic strategist at trading firm Miller Tabak & Co., said it's impossible to know how long Spain — which will tap bond markets on Tuesday and Thursday — can survive paying the current rates before needing a rescue.

"It could go through a few (bond auctions) before you'd argue that this is unsustainable," he said. "It's like applying a vise to a prisoner and making him squeal. How much can he take?"

Spain has already requested a bailout for its banking sector, which is saddled with billions of euros in soured investments after the implosion of a real estate bubble. The country is expected to announce by how much it wants from a €100 billion ($126 billion) eurozone fund after two independent auditors complete evaluations of the banks' needs, due no later than Thursday.

But because the government is ultimately responsible for repaying the banks' bailout money, the deal has increased fears about the size of public debt. If the government cannot get the bailout money back from the banks, it will be saddled with the losses.

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