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Spain fears prompt euro fall and bond yield rise Spain fears prompt bond yield rise and euro fall
(40 minutes later)
The euro has hit its lowest rate against the US dollar for two years, falling to $1.2433. The difference between the cost of Spanish and German bonds has hit a new record on fears about Spain's debt.
The difference between the cost of Spanish and German bonds has also hit a new record on fears about Spain's debt. The Spanish government's 10-year bond yields increased to 6.7% while Germany's fell to 1.31%.
German government 10-year bond yields fell to 1.32%, while Spain's rose to 6.65%.
Yields reflect how much investors demand in return for holding a bond, with a higher yield an indication of the perceived risk.Yields reflect how much investors demand in return for holding a bond, with a higher yield an indication of the perceived risk.
The Italian government has had to pay sharply higher rates to borrow 5.7bn euros ($7.2bn; £4.6bn) from the markets. The euro has hit its lowest rate against the US dollar for two years, falling to $1.2433.
To borrow over five years, it had to pay 5.66%, compared with the 4.86% it paid in an auction in April. The European Commission (EC) has also told Spain it needs further fiscal reforms as it hands all member countries advice to help meet agreed deficit targets.
European stock markets were also unsettled, and were down by about 1-1.5% during morning trade. It says Spain's economy will shrink by 1.8% this year and 0.3% next with unemployment hitting 25.1% in 2013.
Spain's economy has become the focus of investor concern due to the uncertainty surrounding the fate of its banking system. The EC said Spain had taken steps to improve its position and had recently adopted ambitious reforms, including in key areas such as the financial sector, the labour market and collective bargaining but it added that Spain continued to face important policy challenges following the bursting of the housing and credit bubble.
Tax warning Its advice is part of the EC's second annual set of recommendations for the 27-member European Union which are designed to guide members' economic policies for the coming year.
On Friday, Spanish banking group Bankia, which was formed from the merger of several struggling regional lenders, asked for a 19bn-euro bailout, a much larger amount than had been expected. The tax-to-GDP ratio in Spain is among the lowest in the EU. The EC report singles out consumption taxes as particularly in need of reform.
But it is not yet clear how the Spanish government will raise the much-needed funds. It says standard value added tax (VAT) at 18% is at the lower end of the spectrum compared with other EU member states and that revenue from excise duties on tobacco and alcohol is also relatively low and that low property taxes have contributed to Spain's housing boom and also needed reform.
With Spain's borrowing costs and banking system close to breaking point, the European Commission is in a bind.With Spain's borrowing costs and banking system close to breaking point, the European Commission is in a bind.
As guardian of the budget rules it is now nursing a clear analysis of what each member state must do to balance austerity measures with a dash of growth on the side.As guardian of the budget rules it is now nursing a clear analysis of what each member state must do to balance austerity measures with a dash of growth on the side.
But a handful of countries, notably Spain and Italy and the bailout countries of Greece, Ireland and Portugal are under minute scrutiny.But a handful of countries, notably Spain and Italy and the bailout countries of Greece, Ireland and Portugal are under minute scrutiny.
The commission knows that going public on wayward members' latest failings could act like another negative report from the rating agencies - helping tip them even closer to the financial edge.The commission knows that going public on wayward members' latest failings could act like another negative report from the rating agencies - helping tip them even closer to the financial edge.
With the new French president Francoise Hollande pushing for more growth measures, it's likely the commission will put more emphasis on earmarking spending to create jobs.With the new French president Francoise Hollande pushing for more growth measures, it's likely the commission will put more emphasis on earmarking spending to create jobs.
But what the worst-affected southern Mediterranean countries really need at this very moment is not lectures but large sums to shore up their banking systems - cash which neither the EU collectively or its central bank is able to lend them.But what the worst-affected southern Mediterranean countries really need at this very moment is not lectures but large sums to shore up their banking systems - cash which neither the EU collectively or its central bank is able to lend them.
Italy pressure
Tensions over eurozone debt also forced the Italian government into paying sharply higher rates on Wednesday to borrow 5.7bn euros ($7.2bn; £4.6bn) from the markets.
To borrow over five years, it had to pay 5.66%, compared with the 4.86% it paid in an auction in April.
A rate consistently above 7% is considered to be unsustainably high and an indication that markets think a country will be unable to pay its debts; Greece, Portugal and the Republic of Ireland were at that level when they received international bailouts.
European stock markets were also unsettled, and were down by about 1-1.5% during morning trade.
Spain's economy has become the focus of investor concern due to the uncertainty surrounding the fate of its banking system.
Tax warning
On Friday, Spanish banking group Bankia, which was formed from the merger of several struggling regional lenders, asked for a 19bn-euro bailout, a much larger amount than had been expected.
But it is not yet clear how the Spanish government will raise the much-needed funds.
Reports suggested that with borrowing costs rising towards unsustainably high levels, the government may instead give Bankia bonds, which Bankia can then use as collateral to borrow from the European Central Bank (ECB).Reports suggested that with borrowing costs rising towards unsustainably high levels, the government may instead give Bankia bonds, which Bankia can then use as collateral to borrow from the European Central Bank (ECB).
Both sides have refused to confirm reports of the plan, with the ECB denying on Wednesday that it had vetoed the idea.Both sides have refused to confirm reports of the plan, with the ECB denying on Wednesday that it had vetoed the idea.
"Contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank," it said in a statement."Contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank," it said in a statement.
"The ECB stands ready to give advice on the development of such plans," it added."The ECB stands ready to give advice on the development of such plans," it added.
Spain's property boom and bust has left its banking sector very weak, and with unemployment among the highest in the eurozone the country is struggling to raise enough in taxes to fund spending.Spain's property boom and bust has left its banking sector very weak, and with unemployment among the highest in the eurozone the country is struggling to raise enough in taxes to fund spending.
The Bank of Spain's governor, Miguel Angel Fernandez Ordonez, said that the Spanish government's estimates for tax income this year could fall short and spending could be higher than expected.The Bank of Spain's governor, Miguel Angel Fernandez Ordonez, said that the Spanish government's estimates for tax income this year could fall short and spending could be higher than expected.
The governor, who said he would resign a month earlier than scheduled, said if the government's deficit-cutting plans went off course this year it should bring forward a rise in VAT which is planned for 2013.The governor, who said he would resign a month earlier than scheduled, said if the government's deficit-cutting plans went off course this year it should bring forward a rise in VAT which is planned for 2013.
Growth guidance
Later on Wednesday, the European Commission will give its member countries advice to help them meet growth targets.
It will be the second annual set of recommendations, which are designed to guide members' economic policies for the coming year.
The guidance uses the EU's growth strategy (called Europe 2020) as its starting point.
The country-specific recommendations (CSRs) will include in-depth reviews of the economies of 12 of the 27 member countries, including the UK's.
Last week, the International Monetary Fund (IMF) said the UK's continuing economic weakness meant authorities should consider more quantitative easing and even cutting interest rates.
Its annual look at the UK economy endorsed the government's deficit cutting plan, saying it was essential, but added that if growth failed to pick up, the government would have to consider delaying cuts.
The IMF also stressed the risks to the UK of the eurozone crisis.