Defiant Spain to test the bond market

Source: Financial Times

A defiant Spain has said it will tap the sovereign bond markets for funds next week, although the high cost of its borrowing has reinforced analysts’ predictions that the country can no longer avoid an international bailout like those of Greece, Ireland and Portugal.

If Spain does become the fourth eurozone country forced into a bailout, it would send tremors through the global economy and could spell disaster for the five-month-old government of Mariano Rajoy, prime minister.

Mr Rajoy has long insisted that Spain is undertaking vital economic and financial reforms and does not need rescuing. But his ministers’ meetings this week with the US and German governments and the International Monetary Fund – and their statements afterwards – have given credence to the idea that Spain now accepts it needs a bailout, at least for its troubled banks.

The possibility of a costly rescue for Spain depressed the euro and stock markets this week. Investors were particularly alarmed by confusion over the fate of Bankia, a group of seven merged savings banks that needs €19bn in new capital. By Friday, the yield on Spanish 10-year bonds was above 6.5 per cent, perilously close to the 7 per cent mark that could spark wider fears over Spain’s ability to borrow. The Spanish treasury nevertheless said it would auction 10-year and other bonds next Thursday.

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