Eurozone fears rise as Spain hit by debt cost crisis

The yield – the interest rate Spain would have to pay to raise money on the debt markets – on 10-year government bonds jumped to 6.10 per cent on the secondary market. It had closed at 5.93 per cent on Friday after a week of persistent market tension.

The yield is the highest since the country’s new conservative government under Prime Minister Mariano Rajoy took office in December.

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

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

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

Many of the Spain’s 17 semi-autonomous regional governments have overspent wildly;

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 per cent this year. The unemployment rate is 23 per cent, rising up to almost 50 per cent for those aged under 30.

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 – one year and 18-month bills on Tuesday, 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.

After the bailing out Greece, Portugal and Ireland, the eurozone has agreed to increase the size of its financial firewall to help out its members should they fail to raise money from the markets.

However Spain’s economy is twice the size of the previous three bailout victims put together and analysts say the firewall is not large enough to deal with the potential threats coming from Spain and Italy.