Spain’s ailing economy dealt damaging blow

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Spain’s economy moved closer to the rocks yesterday as the country’s borrowing costs surged into so-called bailout territory for the first time since the euro was formed.

The yield on its 10-year bonds spiked past seven per cent after a key ratings agency warned that Spain’s debt could be downgraded to junk status in the next three months.

The warning from Moody’s pushed the interest rate to the same unsustainable level that forced Greece, Ireland and Portugal to take a bailout from the European Union.

The soaring yield is a sign that investors have little confidence in Spain’s ability to repay its finances and have not been won over by a plan to pump nearly 100 billion euros of EU cash into its beleaguered banking sector.

The ongoing crisis weighed on equity markets with the FTSE 100 Index in London falling nearly one per cent, while Germany’s Dax and the Cac-40 in France also dropped into the red.

The worsening situation in Spain comes ahead of Sunday’s crucial election in Greece, which is being viewed by many as a make-or-break moment for the eurozone.

Success for an anti-austerity party like Syriza could ultimately lead to Greece leaving the euro, while wins for pro-bailout groups will see years of harsh spending cuts imposed on its people.

Meanwhile, Italy saw its borrowing costs rise at a debt auction. The country paid 5.3 per cent interest rates on three-year bonds, up from 3.91 per cent last month. However, the sale was fully subscribed, showing good demand for Italy’s debt.