Spain’s Borrowing Costs At Fresh High After Moody’s Cut

Posted by on Jun 14, 2012 | Comments Off on Spain’s Borrowing Costs At Fresh High After Moody’s Cut

 

Spain’s borrowing costs have risen to another euro-era record, with lenders demanding a higher interest rate.

Italy also saw borrowing costs rise, selling bonds repayable in three years with a yield of 5.3%, up from 3.9%.

At the weekend, Spain agreed a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.

“The risk of losing investment grade pressured the differential this morning and left it at historic highs,” analysts at Spanish brokerage Renta 4 said in a market report.

Meanwhile, Italy sold 3-year bonds by paying an interest rate of 5.3%, sharply up from the 3.91% paid at a similar sale on 14 May.

However, it is unclear whether the Cypriot government will seek a loan from its European partners or will instead turn to Russia, who already provided it with a 2.5bn-euro loan in December

Concern about Italy’s debt levels have been growing despite Prime Minister Mario Monti insisting that the banking system and the government ability to repay its debts are secure.

On Wednesday, Moody’s also cut its credit rating for Cyprus by two notches, from Ba1 to Ba3. Cypriot banks are heavily exposed to the troubled Greek banking system.

The difference in the rate between Spanish and safe-haven German 10-year bonds widened to a high of 5.44 percentage points.

If Spain is cut to junk, some index-tracking investors would be forced to sell the country’s bonds. This would add to upward pressure on yields and push Spain’s financing costs higher, heightening the risk that the country will need a full-blown bailout.

It was hoped that the bailout would help calm fears in the financial markets about the strength of Spain’s banks and ease Madrid’s borrowing costs.

 

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