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G20 calls for action as Spanish debt costs soar

Spain paid a euro era record price to sell short-term debt yesterday, pushing it closer to becoming the biggest euro zone country to be shut out of credit markets.

The soaring borrowing costs highlight the shortcomings of a June 9 euro zone deal to lend Spain up to e100 billion (R1 trillion) for its banks. They also illustrate how Europe’s problems run much deeper than Greece, brought back from the brink of default in Sunday’s parliamentary election.

German Chancellor Angela Merkel arrives to the G20 Summit in Los Cabos June 18, 2012. G20 leaders kick off two days of meetings in the Pacific resort of Los Cabos on Monday. REUTERS/Henry Romero (MEXICO - Tags: POLITICS). Credit: REUTERS

Leaders of the world’s major economies, meeting for a Group of 20 (G20) summit in Los Cabos, Mexico, piled pressure on the euro zone to take decisive steps towards a fiscal and banking union to stem the debt crisis that is holding back the global economy.

German Chancellor Angela Merkel has agreed to move towards a more integrated banking system, according to a draft G20 communique, but she continues to rule out mutualising the euro zone’s debts.

Spain had to pay 5.07 percent to sell 12-month treasury bills and 5.11 percent to sell 18-month paper – an increase of about 200 basis points on the last auction for the same maturities a month ago.

While Spain’s 10-year bond yields eased slightly to around 7 percent after the sale, the auction underscored the government’s pleas for help from the European Central Bank (ECB), two days before Madrid tries to sell three- to five-year bonds.

Finance Minister Cristóbal Montoro said on Monday that the ECB should step in to fight market pressure, essentially a call for the bank to buy Spanish bonds again, as it did last year.

Those appeals have so far gone unheeded, partly because the ECB believes it can have little lasting influence on market confidence unless euro zone political leaders take bold decisions to strengthen the 17-nation currency zone.

The central bank, the only federal institution with the capacity to act swiftly and decisively, is also split between hawks and doves, with German-led hardliners opposing further purchases of government bonds of debt-stricken nations.

ECB president Mario Draghi said this month that it was up to Europe’s politicians to act to fix the euro zone. But he hinted last Friday that the bank might soon cut interest rates, pointing to heavy downside risks for the European economy and saying there was no inflation risk in any euro zone country.

Speaking to reporters on the sidelines of the G20 summit, Spanish Economy Minister Luis de Guindos said Madrid’s policies were not to blame for the loss of investor confidence.

“We think… that the way markets are penalising Spain today does not reflect the efforts we have made or the growth potential of the economy,” he said. “Spain is a solvent country and a country which has a capacity to grow.”

Some market experts said the strong demand at yesterday’s treasury bill auction reflected expectations that Spain would be able to avoid a full state bailout of the kind international lenders have provided for Greece, Ireland and Portugal.

But others voiced doubt that Spain, a proud, ancient nation that was a fast-growing star of the euro zone for a decade until a housing bubble burst in 2008, could avoid a sovereign rescue. – Reuters

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