25th Oct 2016

Spanish and Italian borrowing costs soar

  • The Deutsche Borse in Frankfurt (Photo: Astrid Walter)

The cost of insurance against a Spanish default reached another record on Monday, with Italy's borrowing costs also rising sharply amid continued market fears about the fate of the eurozone.

"With a risk premium at 500 points, it is very difficult to raise finances," Spanish Prime Minister Mariano Rajoy said Monday (28 May) in a press conference. His country's 'debt risk premium' - the default insurance investors demand on Spanish bonds compared to German bunds - that day leapt to a eurozone record of 514 basis points.

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But Rajoy insisted Spain was not seeking financing from the eurzone bail-out fund, but rather alluded to earlier calls for the European Central Bank (ECB) to resume its bond-purchasing or cheap bank loans programmes which last year helped both Spain and Italy lower their borrowing costs.

"We need a clear, forceful and energetic defence of the euro," Rajoy said. Last week he noted that ECB money is a more pressing issue than the theoretical discussion about further political integration of the eurozone.

Part of Spain's problem is its troubled banks. The government on Friday pumped an extra €19 billion into Bankia, its fourth-largest lender, in what is so far the biggest Spanish bank bail-out. Madrid already injected €4.4 billion earlier this month. Reports suggest another €30 billion may be needed - with an independent audit under way to examine the state of Spanish lenders.

Fears about a possible Greek exit from the eurozone, labelled "Armageddon" by some senior bankers, are affecting Spain as it seeks funding from the markets.

Charles Dallara, the manager of the International Institute of Finance, an umbrella group of the world's largest banks, last week said a Greek exit would cost more than €1 trillion and seriously damage other southern countries.

“Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again," Dallara told Bloomberg in an interview.

Similar to Spain, Italy's borrowing costs also spiked on Monday, with two-year bonds selling at extra costs of over four percent, compared to a 3.3 percent rate last month before the Greek elections.

Meanwhile, German bonds last week sold at a record of zero-percent interest, as investors are flocking to these 'safe-haven' treasury papers.

European Parliament chief Martin Schulz, himself a German national, said last week that this widening gap between Germany and other eurozone countries is "destroying Europe" and urged the German chancellor to change policies.

A meeting called by Italy's premier Mario Monti next month in Rome with Rajoy, France's Francois Hollande and Germany's Angela Merkel is likely to see more pressure put on the German leader to accepting some form of joint debt issuing - the so-called eurobonds.

The prospect of having these joint bonds could help alleviate the borrowing problem for southern countries in the long run and lift the pressure from the ECB to continue buying up debt or injecting cheap loans into the eurozone banks.

But Germany, who borrowing costs would rise under such a scheme, has said this is a long term solution only.


Europe ready to tackle Greek debt relief

The Greek government has built and broadened alliances in EU institutions and member-states that acknowledge the need to restructure the debt and deliver another economic model for the eurozone.

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