Investors punished Spain's bonds Monday as early euphoria over a vast eurozone loan to rescue stricken banks transformed into deep concern over its mushrooming sovereign debt.
Spain's eurozone partners agreed Saturday to extend up to 100 billion euros ($125 billion) to salvage a banking sector weakened by reckless lending in a property market that crashed in 2008.
The rescue, which represented a U-turn by Madrid, eased concern about the risk of a Spanish financial sector calamity, but the sheer size of the loan fed anxiety over Spain's fast-growing public debt.
Spain's 10-year government bond yields eased at first, but by mid-afternoon they had surged to 6.424 percent - well above Friday's close of 6.216 percent before the eurozone agreement.
The risk premium - the extra rate investors demand to hold Spanish 10-year government bonds over their safer German counterparts - shot to 5.08 percentage points after closing last week at 4.89 percentage points.
“Plenty of risk still remains in place, with question marks over the ability of Spain to repay the debt, especially if the country fails to get back on the growth path, the outcome of the upcoming Greek elections and the perception of the situation in Italy,” Anita Paluch of Gekko Global Markets said.
A rally on the Madrid stock market also wilted. After soaring by 5.93 percent in opening trade, the IBEX-35 index of leading shares was up 1.18 percent at 6,629.00 in the afternoon.
Spain's Treasury had sought to ease concerns over the impact of the rescue loan on Spain's sovereign debt.
Far from undermining Spanish public debt, it would “reinforce its overall solvency,” the Treasury said in a joint statement with the Economy Ministry.
Spain vowed to carry on tapping the debt markets after raising 56.8 percent of the total 86 billion euros it plans this year through regular auctions of medium- and long-term bonds.
A formal request for the rescue loan is expected by the next eurozone finance ministers meeting scheduled for June 21, European Economic Affairs Commissioner Olli Rehn said Sunday.
The final figure will be known after the European Union, European Central Bank and IMF finish a review of the situation and a formal accord will then be signed, he said.
A report by Barclays Capital analysts said that a loan of 70-80 billion euros would push up Spain's public debt by 7.0-7.5 percentage points from the end-2011 level of 68.5 percent of economic output.
Under this scenario, Spanish public debt would likely peak at 95 percent of economic output by 2015, they predicted, meaning that fundamentally the state would remain solvent.
“However, the problem confronted by Spain and the rest of the periphery is bigger,” the analysts said, warning that the crisis could not end while there remained a risk of fragile economies leaving the eurozone.
Lee Hardman, currency analyst at Bank of Tokyo-Mitsubishi UFJ, said the increase in debt levels would leave Spain “even more vulnerable to a further negative shock”.
Greece's June 17 elections could also panic the markets if voters elect a government that rejects austerity conditions for the country's bailout, potentially leading to its stormy exit from the eurozone.
“The unstable political situation in Greece which could potentially lead to Greece exiting the euro could prompt additional capital flight from Spain despite the recapitalisation plan,” Hardman said in a report.
Spain's Prime Minister Mariano Rajoy told reporters Sunday the deal ensured “the credibility of the euro” and insisted that rather than buckling to pressure for the rescue, he had sought it all along.
His government has vowed to slash Spain's public deficit from 8.9 percent of total economic output last year to just 5.3 percent this year and 3.0 percent in 2013.
But economists say Spain faces a daunting task achieving those goals in a period of recession, which cuts on tax income, and with unemployment at 24.4 percent, which raises welfare costs. - Sapa-AFP