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Spain and Italy borrowing costs rise Spain borrowing costs hit euro-era record high
(about 1 hour later)
Spain and Italy's borrowing costs rose on Tuesday as the initial optimism that greeted the Spanish bank bailout continued to evaporate. Spain's borrowing costs have risen to the highest rate since the launch of the euro in 1999.
Spain's benchmark 10-year bond yields hit 6.65%, nearing the six-month highs seen in May. Italy's 10-year bond yield rose to 6.19%, not seen since January. The benchmark 10-year bond yield hit 6.81%, as optimism about the weekend's Spanish bank bailout continued to evaporate.
Italy's 10-year bond yield rose to 6.28%, a rate not seen since January, as concerns about its finances rose.
The interest rates are seen as unsustainable in the long run for two countries weighed down by huge debts.The interest rates are seen as unsustainable in the long run for two countries weighed down by huge debts.
European stock markets were slightly higher, but bank shares see-sawed. Adding to pressure on Spain, ratings agency Fitch downgraded the creditworthiness of 18 of the country's banks.
Barclays initially fell 3.8%, while RBS was about 2% lower. But the stocks moved back into positive terrority, before again falling about 1.5% in afternoon trading. On Monday, Fitch cuts its ratings on Spain's two biggest banks, Santander and BBVA.
In Spain, shares in the biggest lenders Santander and BBVA fell 1.3% and 0.9% respectively following a downgrade from ratings agency Fitch, but then clawed back the losses. Growing investor concern about the Spanish bank bailout did not, however, unnerve European stock markets, which until late afternoon had traded slightly higher for most of Tuesday.
All the main European bourses were about 0.5% higher in early afternoon trading. But bank shares fluctuated during day. Barclays initially fell 3.8%, while RBS was about 2% lower. But the stocks moved back into positive terrority, before again falling about 1.5% in afternoon trading.
In Spain, shares in the biggest lenders Santander and BBVA fell 1.3% and 0.9% respectively following the Fitch downgrades, but then clawed back the losses.
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. Glossary in full		 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. Glossary in full
In Asia, the Nikkei 225 index closed 1% down while the Hang Seng index dropped 0.6%.In Asia, the Nikkei 225 index closed 1% down while the Hang Seng index dropped 0.6%.
After an initial relief rally following the 100bn-euro ($125bn; £80bn) bailout of Spanish banks over the weekend, analysts said the markets had returned to a mood of caution.After an initial relief rally following the 100bn-euro ($125bn; £80bn) bailout of Spanish banks over the weekend, analysts said the markets had returned to a mood of caution.
"This is a realisation that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio," said Paul Zemsky, head of asset allocation at ING Investment Management."This is a realisation that Spain, while providing money for its banks, is going to add to its debt-to-GDP ratio," said Paul Zemsky, head of asset allocation at ING Investment Management.
"They're borrowing more money, not doing anything about growth," he added."They're borrowing more money, not doing anything about growth," he added.
"Today we're not worried about Spain's banking system falling off a cliff, but other than that, nothing's changed.""Today we're not worried about Spain's banking system falling off a cliff, but other than that, nothing's changed."
Rather than soothe fears in the financial markets, the bailout of Spain's banks revealed new doubts over its impact on the country's overall debt level, where the rescue funds would come from, and whether the money would be enough.Rather than soothe fears in the financial markets, the bailout of Spain's banks revealed new doubts over its impact on the country's overall debt level, where the rescue funds would come from, and whether the money would be enough.
It has still to be decided whether Spain's bailout money will come from existing European Financial Stability Facility, or a new fund, the European Stability Mechanism (ESM).It has still to be decided whether Spain's bailout money will come from existing European Financial Stability Facility, or a new fund, the European Stability Mechanism (ESM).
Under the terms of the ESM, loans will have priority for repayment over private sector investors. This has worried investors buying new Spanish bonds.Under the terms of the ESM, loans will have priority for repayment over private sector investors. This has worried investors buying new Spanish bonds.
On Tuesday, Greece raised about 1.62bn euros in a sale of six-month treasury bills, but had to pay an interest rate of 4.73%, up from 4.69% at a previous sale on 8 May.On Tuesday, Greece raised about 1.62bn euros in a sale of six-month treasury bills, but had to pay an interest rate of 4.73%, up from 4.69% at a previous sale on 8 May.
'Too little too late'
Worries about the fragility of some eurozone economies were not helped by comments from Austria's finance minister Maria Fekter, who on Monday refused to rule out that Italy may need EU rescue money in the coming months.Worries about the fragility of some eurozone economies were not helped by comments from Austria's finance minister Maria Fekter, who on Monday refused to rule out that Italy may need EU rescue money in the coming months.
Although, on Tuesday, she emphasised that there were no signs that Rome would need bailout aid, Italy's prime minister Mario Monti called her remarks "completely inappropriate". Although, on Tuesday, she emphasised that there were no signs that Rome would need bailout aid, Italy's Prime Minister Mario Monti called her remarks "completely inappropriate".
'Too little too late'
While the eurozone debt crisis has been a cause of concern for some time, it has so far affected relatively smaller economies such as Greece and Portugal.While the eurozone debt crisis has been a cause of concern for some time, it has so far affected relatively smaller economies such as Greece and Portugal.
However, as the crisis spreads to bigger nations such as Spain and Italy, there are fears that growth in the region may slow even further.However, as the crisis spreads to bigger nations such as Spain and Italy, there are fears that growth in the region may slow even further.
"The eurozone crisis needs much more than short-term measures - but all the investors are seeing is political infighting rather than a collective long-term plan," Justin Harper of IG Markets told the BBC."The eurozone crisis needs much more than short-term measures - but all the investors are seeing is political infighting rather than a collective long-term plan," Justin Harper of IG Markets told the BBC.
"The European policy makers are slow to react to the issues. They are doing too little, too late.""The European policy makers are slow to react to the issues. They are doing too little, too late."
Broader fallsBroader falls
Analysts said the latest fears arising from the eurozone had added to worries about a global slowdown, hurting demand for oil.Analysts said the latest fears arising from the eurozone had added to worries about a global slowdown, hurting demand for oil.
They said that a fragile recovery in the US coupled with slowing growth in emerging markets such as China and India had hit investor sentiment.They said that a fragile recovery in the US coupled with slowing growth in emerging markets such as China and India had hit investor sentiment.
"It is a continued set of bad news from all across the globe, and we have been belted with it for months on end without any let up," said David Lennox, a resources analysts with Fat Prophets in Sydney."It is a continued set of bad news from all across the globe, and we have been belted with it for months on end without any let up," said David Lennox, a resources analysts with Fat Prophets in Sydney.
In London, the price of Brent crude fell 1% to $96.90 a barrel.
Mr Lennox added that if global economic uncertainty continues and oil production levels remain the same, prices may fall even further.Mr Lennox added that if global economic uncertainty continues and oil production levels remain the same, prices may fall even further.