Spanish bonds looking peaky

The financial crisis afflicting southern Europe has taken a turn for the worse, as the difference between German and Spanish bond yields gets bigger than ever.

by Michael Northcott
Last Updated: 19 Aug 2013

The situation in Spain is on the verge of being as desperate as that of Greece, if investors know what they’re talking about. Having just bailed out the country’s fourth largest bank, Bankia, the government is looking increasingly financially precarious. The markets know it, and the difference between Spanish bond yields and German ones has hit a new record, with 5.21% between the two yields. 

German 10-year yields have dropped as low as 1.34%, but Spain’s rose 0.07% to a new high of 6.55%, around five basis points above what is considered the ‘safe zone’. Spain has become a serious concern for investors as the country battles record 25% unemployment and news in recent weeks that it has now re-entered recession. 

A string of ailing banks and the rising costs of borrowing are tightening the straitjacket for a government already struggling to keep the country on its feet. The governor of the Bank of Spain, Miguel Angel Fernandez Ordonez said today that tax revenues could fall short of expectations, and public spending exceed them, prompting speculation that the government’s financial plight is spiralling out of control. 

In a sign that investors are fleeing from all of the PIIGS countries, not just Spain and Greece, Italian bond yields also rose above the 6% mark in advance of a new bond issue from the Italian government. With such a gloomy set of circumstances unfolding, the eurozone situation looks as though it can only get worse. It could be tin-hat time soon…

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