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Spain’s borrowing costs take worrisome jump

2nd recession in 3 years predicted

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MADRID | The interest rate on Spanish government bonds rose sharply on Monday, a sign that investors are becoming more worried about the country's ability to afford mounting debts as its economy shrinks.

The rate, or yield, on the country's 10-year government bonds jumped to 6.10 percent on the secondary market, the highest since the country's new conservative government under Prime Minister Mariano Rajoy took office in December. Later on Monday, the yield dropped slightly, to 6.02 percent. It had closed at 5.93 percent Friday after a week of persistent market tension.

The 10-year bond yield surged toward 7 percent late last year, a level considered unsustainable for a country over a long period. Greece, Portugal and Ireland had to ask for bailouts after their yields stayed above 7 percent.

Although the administration has implemented a barrage of labor and financial reforms, investors remain worried about Spain on several fronts:

c The country's banks are weighed down by a mountain of bad loans from the collapse of the property market in 2008.

c Many of Spain's 17 semiautonomous regional governments have overspent wildly.

c Spain is expected to enter its second recession in three years this quarter, with the country's central bank forecasting its economy will contract 1.7 percent this year. The unemployment rate is nearly 23 percent, rising up to almost 50 percent for those younger than 25.

The jump in Spain's yield comes at the beginning of a week in which the country's Treasury holds two rounds of bond auctions - on 12- and 18-month bills on Tuesday on and benchmark 10-year bonds on Thursday.

The government insists it will have no trouble financing itself this year and that auctions held so far this year have gone well. But that changed almost two weeks ago, when a medium-term debt auction hit the bottom end of what the Treasury had targeted, triggering the latest increase in yields and placing Spain firmly back into the center of the eurozone debt crisis.

The situation was not helped by government-released data Friday showing the country's troubled banks borrowed a record $415.9 billion from the European Central Bank in March, demonstrating the difficulty they have securing financing elsewhere.

Spain probably will step in and take over the finances of one or more of the country's debt-crippled regional governments before the end of the year, a senior Spanish government official told reporters Monday.

Some of the regions which function like U.S. states but also control local spending of the national education and health care budgets have lost access to financing on the debt markets and soon will be unable to pay their bills without central government assistance, said the official, speaking on condition of anonymity because of department policy.

Monday's bond-market jitters extended to Italy, viewed as another weak link in the 17-nation eurozone. Its 10-year bond yield rose to 5.60 percent from about 5.57 percent on Friday.

After bailing out Greece, Portugal and Ireland, the eurozone has agreed to increase the size of its financial firewall to help members should they fail to raise money from the markets. But Spain's $1.45 trillion economy is twice the size of the previous three bailout victims put together. Analysts say the eurozone's financial firewall is not large enough to deal with the potential threats coming from Spain and Italy.

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