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Spain fears prompt bond yield rise and euro fall Spain fears prompt bond yield rise and euro fall
(40 minutes later)
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 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%.The Spanish government's 10-year bond yields increased to 6.7% while Germany's fell to 1.31%.
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 euro has hit its lowest rate against the US dollar for two years, falling to $1.2433. The European Commission has urged Spain to "substantially speed up" and fully implement reforms to cut its deficit.
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. As part of its second annual economic health check of European Union members, it said Spain needed further fiscal reforms, including spending cuts and higher taxes.
It says Spain's economy will shrink by 1.8% this year and 0.3% next with unemployment hitting 25.1% in 2013. It says Spain's economy will shrink by 1.8% this year and 0.3% next with the unemployment rate hitting 25.1% in 2013.
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. The commission said Spain had taken steps to improve its position and had recently adopted ambitious reforms, including key areas such as the financial sector and the labour market, but it added that the country continued to face problems following the bursting of the housing and credit bubble.
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. "Spain still faces significant challenges in rebuilding market confidence, securing the sustainability of public finances, reducing domestic and external vulnerabilities and underpinning medium-term growth and employment," the report said.
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. "In consequence, there is need to fully implement the ongoing reforms and substantially speed up reforms in the product and service markets."
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.
Under EU rules, Spain needs to reduce its fiscal deficit from 8.9% of GDP, or economic output, to 3% by 2013.
Italy pressureItaly 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.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.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.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.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. The euro hit its lowest rate against the US dollar for two years, falling to $1.2433.
Tax warningTax warning
Spain's economy has become the focus of investor concern due to the uncertainty surrounding the fate of its banking system.
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.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.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.