Spain worries unnerve market

The financial pressure on recession-hit Spain has ratcheted up further to a level that saw other European countries need a financial bailout.

The yield on Spain’s benchmark 10-year bond spiked 0.23 percentage points to 7.46 per cent,  well above the 7.0 per cent danger level for long-term funding.

Any yield over 6.0 per cent is widely seen as unsustainable for long-term funds, with 7.0 per cent the level at which Greece, Ireland and Portugal had to ask for outside help from the EU and International Monetary Fund.

Worries over the financial health of the Spanish regions have contributed to the latest spike too. Those concerns have swelled after the Bank of Spain said on Monday that the Spanish economy contracted by a quarterly rate of 0.4 per cent in the second quarter, worse than the 0.3 per cent of the first quarter.

This comes after the government said on Friday that the recession would continue next year, instead of end with modest growth as it previously forecast.

The bad data compounds Madrid’s pressing problems, chief among them how to cut an unprecedented unemployment rate of more than 24 per cent while at the same time stabilising a stricken banking system and the public finances.

The government recently announced massive spending cuts and other measures to stabilise its public finances but the austerity programme seems only to have driven speculation that Madrid may need a full EU-IMF bailout.

Since the Spanish economy is much larger than those of Greece, Ireland and Portugal combined, there are growing raised concerns that EU rescue mechanisms might not be enough to cope, especially if Italy has problems too.

“Europe is definitely a drag on risk assets again this week as investors are worried that Spain’s debt burden could be bigger than expected and that a full bailout may be required,” Peter Esho at CityIndex in Australia said.

On Friday, the EU approved the bank bailout deal for Madrid but any positives were more than outweighed by news that the Valencia region was to ask the central government for financial aid.

Spain last year missed its public deficit target of 6.0 per cent of economic output by a wide margin, coming in instead at 8.9 per cent, with the 17 regional governments, which fund education and health, largely blamed for the blowout.

There are signs of growing discontent at the economic pain being heaped on the Spanish public.

Hundreds of thousands of Spaniards marched against the centre-right government’s latest measures on Thursday evening, following more than a week of demonstrations across the country.