Rising Interest Rates Spain Slides Further into Crisis

The situation on the financial markets is getting tougher for Spain. The interest rates the country must pay on longer-term, 10-year bonds rose on Monday to over 6 percent for the first time this year. The government in Madrid is also warning that Spain has fallen back into recession.
A protest against austerity measures in Madrid over the weekend: The recession has returned to Spain.

A protest against austerity measures in Madrid over the weekend: The recession has returned to Spain.

Foto: Alberto Di Lolli/ AP

Spain is once again experiencing tremendous pressure from the financial markets. With the economy sliding and Spanish banks no longer able to finance themselves independently, doubts are growing  among investors that the country can service its debts without outside help. Some are already speculating that Spain will have to request aid from the European Union's euro rescue fund.

On Monday, the interest rate on 10-year government loans rose for the first time this year to over the 6-percent mark, increasing by 0.13 points to 6.12 percent. Investors are demanding increasingly higher risk premiums in order to buy Spanish bonds.

The cost for credit loss insurance also rose to a record high. For securities with a five-year term and a face value of $10 million, insurers are demanding an annual premium of $520,000.

"We're back in full crisis mode," Rabobank strategist Lyn Graham-Taylor said, according to Reuters. "It is looking more and more likely that Spain is going to have some form of a bailout." For weeks now, markets have been rife with speculation that Spain may have to borrow money from the European Financial Stability Facility (EFSF) in order to shore up its foundering banks. Figures ranging from €50 billion to €100 billion are being bandied about.

The Spanish banks are so saddled with a mountain of non-performing real estate loans that few other European banks are willing to continue to lend them money. Instead they must rely on the European Central Bank (ECB) for fresh infusions of cheap money. In March, the banks borrowed a record €316 billion from the ECB -- close to twice the amount borrowed in February.

Economy Contracts for Second Quarter in a Row

But the question of whether Spain  will soon need money from the euro backstop fund in order to finance its national debt is a divisive one. Many experts believe that an interest rate that is greater than 6 percent for 10-year bonds is unsustainable in the long run. But others have noted that, prior to the introduction of the euro, the country had been forced to pay significantly higher interest rates in some cases.

Still, 6 percent is considered psychologically important because once interest rates got that high in other countries in the euro crisis, the pace at which it continued to rise accelerated. Once interest levels hit 7 percent in Greece, Ireland and Portugal, those countries were all forced to seek assistance from the bailout fund because they were no longer able to find enough private investors.

In addition to its banking industry troubles, Spain is suffering an economic downturn. The government admitted on Monday that the country had probably fallen into its second recession since 2009. The economy shrank by 0.3 percent during the final quarter of 2011. "At the moment, I see a first quarter with a similar pattern to the last quarter of last year," Spanish Economics Minister Luis de Guindos told the country's El Mundo newspaper on Monday. But he also added: "If you had asked me two months ago, I would have expected the first quarter of 2012 to be much worse than the last quarter of last year. But that's not going to be the case. "

In order to spur the economy, Guindos said the government wants to provide better access to loans for small- to medium-sized companies through new measures to be introduced in the next few weeks. The economics minister said Madrid would seek to promote the market for business loans in ways that would make it very attractive for such firms. Guindos said these companies had recently had difficulties refinancing themselves, with bank lending falling by about 4 percent -- a reflection of how the banks' financing problems are being passed on to other sectors.

dsl -- with wires
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