Spain's borrowing costs at fresh high after Moody's cut

Norbert Aul, RBC Capital markets: "The Spanish bailout has to be clarified further"

Spain's borrowing costs have risen to another euro-era record, with lenders demanding a higher interest rate.

The yield on benchmark 10-year bonds hit 7% in early trade, a level which many analysts believe is unsustainable in the long term. It later fell back slightly.

It came as Moody's cut Spain's credit rating to one notch above "junk".

Italy also saw borrowing costs rise, selling bonds repayable in three years with a yield of 5.3%, up from 3.9%.

At the weekend, Spain agreed a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.

It was hoped that the bailout would help calm fears in the financial markets about the strength of Spain's banks and ease Madrid's borrowing costs.

However, Moody's said the eurozone plan to help Spain's banks would increase the country's debt burden.

Moody's cut Spain's rating from A3 to Baa3 and said it could reduce this further within the next three months.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

If Spain is cut to junk, some index-tracking investors would be forced to sell the country's bonds. This would add to upward pressure on yields and push Spain's financing costs higher, heightening the risk that the country will need a full-blown bailout.

The difference in the rate between Spanish and safe-haven German 10-year bonds widened to a high of 5.44 percentage points.

"The risk of losing investment grade pressured the differential this morning and left it at historic highs," analysts at Spanish brokerage Renta 4 said in a market report.

Meanwhile, Italy sold 3-year bonds by paying an interest rate of 5.3%, sharply up from the 3.91% paid at a similar sale on 14 May.

Concern about Italy's debt levels have been growing despite Prime Minister Mario Monti insisting that the banking system and the government ability to repay its debts are secure.

No quick fix

On Wednesday, Moody's also cut its credit rating for Cyprus by two notches, from Ba1 to Ba3. Cypriot banks are heavily exposed to the troubled Greek banking system.

Start Quote

The risk premium for lending to the slightly shambolic household of Peston, as opposed to the sovereign nation of Italy, is rather less than I expected”

End Quote

However, it is unclear whether the Cypriot government will seek a loan from its European partners or will instead turn to Russia, who already provided it with a 2.5bn-euro loan in December.

Despite worries in the financial markets, German Chancellor Angela Merkel restated that there were no quick fixes. to the eurozone's problems.

Speaking to the German parliament on Thursday, and ahead of a G20 summit this weekend, she said: "We must all resist the temptation to finance growth again through new debt."

Germany, the main backer of eurozone bailout funds, has been criticised for its insistence that debt-laden countries must persist with austerity and not be allowed to renegotiate their rescue conditions.

Mrs Merkel also said that world leaders should not "overestimate" Germany's ability to resolve the crisis, saying that the country's options for rescuing the eurozone were "not unlimited".

Eurozone debt crisis bailouts

Who When How much Main problem

Spain

Spanish flag and Bankia branch

June 2012

Up to 100bn euros

Some banks borrowed large amounts to lend out, feeding a property boom. The credit crisis and recession meant billions of euros worth of loans could not be repaid

Greece

Greece flag

May 2010 and March 2012

110bn and 130bn euros. Private lenders also

wrote off debt

Greece borrowed large amounts for public spending. The financial crisis, combined with deep-seated problems such as tax evasion, left it with massive debts

Portugal

Portugal flag

May 2011

78bn euros

High government spending and a weak, uncompetitive, economy built up debts it could not pay back

Republic of Ireland

Irish flag

November 2010

85bn euros

Like Spain, a property crash plunged the "Celtic Tiger" economy into recession, saddling its banks, which had lent big to developers and homebuyers, with huge losses

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