Spain unnerves the stock market after 10-year bonds reach an alarming rate
Spain unnerves the stock market after 10-year bonds reach an alarming rate
James Jomo and Olivier LeCourt
Modern Tokyo Times
The Prime Minister of Spain, Mariano Rajoy, faces more internal pressures because of the reality that many regional governments are alarmingly indebted. In the last few days Valencia asked for economic assistance from the central government. Likewise, the Murcia region indicated it may follow suit. Therefore, the endless economic woes are putting enormous pressure on the yield of Spain’s 10-year bonds.
Following on from regional government pressures in Spain and the new yield rate reaching 7.56% for 10-year bonds, then markets across Europe were hit badly. At the same time the value of the euro suffered and reached a new two year low against the America dollar which is weak against the Japanese yen. This further indicates the weakness of the euro because the American economy is not in great condition and the dollar and yen rate is vindication of this.
A few weeks ago Rajoy made it abundantly clear that Spain could not manage the current high rates in the long-term. He stated this when the rate was 7.28% and clearly the new high of 7.56% is sending shock waves throughout political corridors in Spain.
It is viewed that anything above the 7.0% yield rate is unaffordable when applied to refinancing. The frankness of Rajoy about the economic plight of Spain is extremely clear. Therefore, with many regional governments faced with mass uncertainty the government of Spain can’t find any respite from the economic crisis hitting this nation and other countries throughout the Eurozone.
Rajoy is also worried about financial institutions in Spain being frozen out of the international markets. He stated that “There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries.”
Recenlty the Eurozone nations pledged 100 billion euros to the Spanish government in order to shore up the capital base and banking sector. Yet with the government bond rate reaching an alarming rate then clearly the government of Spain is worried about refinancing and supporting the economy at the central and regional level. Added to this the Bank of Spain stated the economy is not only in recession but it is getting worse. This applies to the two quarterly periods showing a 0.3% contraction in the last quarter of 2011 and the first quarter of 2012. It was feared before the announcement of the second quarter in 2012 that the contraction of 0.3% would increase at “a more intense pace” according to the Bank of Spain. The last quarter at the end of June 2012 witnessed a 0.4% contraction which is in line with the fears of the Bank of Spain.
The Murcia local government stated that “Regarding the liquidity fund provided by the state, the regional government has repeatedly stated that it is studying whether to apply for it.” On top of this, it is reported that other regional governments are also thinking on the same lines. Therefore, this will increase the pressure on the government of Spain.
European markets responded to the latest news by showing stock market declines. In Spain the Ibex index was down by more than 5%. Likewise, Italy, which is also facing major internal economic convulsions, witnessed a decline of 4.4%.
Justin Harper of IG Markets stated “The fear now is that, given its debt woes, Spain may eventually need a bailout from the International Monetary Fund or the eurozone’s rescue fund.”
