Spanish Borrowing Costs Touch 7 Percent

PARIS — European leaders were facing increasing pressure on Thursday to respond to the euro crisis, as Spanish 10-year bond yields hit the 7 percent level that has served to trigger full international bailouts of other euro zone members, and Italian borrowing costs rose sharply at a debt auction.         

Spain’s borrowing costs soared after Moody’s Investors Service downgraded the country’s bond rating late Wednesday, with the yield on the 10-year bond touching 7 percent for the first time in the euro era. In Rome, the national Treasury sold 4.5 billion euros, or $5.6 billion, of debt, including three-year bonds maturing priced to yield 5.30 percent, up from the 3.91 percent it paid to move similar securities last month.        

 Higher borrowing costs threaten the $125 billion “bailout lite” Madrid worked out with European officials to recapitalize its banking sector, as that deal was contingent on Spain being able to continue tapping the bond market for its regular financing needs. For both Spain and Italy, rising yields endanger hopes that the countries will be able to overcome their problems without full bailouts, because high interest rates make refinancing unsustainably expensive.

Portugal, Ireland and Greece all ended up seeking rescues from the European Union, the International Monetary Fund and the European Central Bank when they gave up hope of market funding. A full bailout of Spain would severely tax E.U. resources and turn the full glare of market scrutiny onto Italy, the third-largest economy in the euro zone, after Germany and France.

Still, Europe’s policy makers remain divided on how to deal with the crisis, just days before the crucial Greek election Sunday and a meeting with President Obama and other heads of state at the Group of 20 summit Monday in Mexico.

Chancellor Angela Merkel of Germany, the most important actor in the European drama, indicated Thursday in an address to the German Parliament that she would resist any outside attempts to force Germany to concede to what she called “simple” and “counterproductive” quick fixes. That, she said, includes a rejection of the jointly issued euro bonds and other forms of shared debt that some leaders, including the French president, François Hollande, have called for.        

 Only by solving the root of Europe’s problems, she said, by strengthening political unity, will the region be able to recover fully from the crisis. She cited the massive debt and the lack of competition in the weaker economies of the union.

“We will only be successful when every, and I stress every, member country of the European Union, the European and international institutions as well as the peoples in our individual countries are ready to recognize the facts and realistically sum up our powers and put them to use for the greater good,” Ms. Merkel said.

She called for more innovation, improved technologies and a strengthened European domestic market and more flexible job market and less bureaucracy as key elements needed in order to ease the problems in the long term.

“I know it is arduous, that it is painful, that is a drawn-out task,” Ms. Merkel said. “It is a Herculean task, but it is unavoidable.”

Ms. Merkel also warned against overtaxing Germany, saying: “Germany’s strength is not endless. Germany’s powers are not unlimited. Consequently, our special responsibility as the leading economy in Europe means we must be able to realistically size up our powers, so we can use them for Germany and Europe with full force.”

Ms. Merkel’s address, setting Germany’s position before the coming G-20 meeting, was expected to be answered by Mr. Hollande and Prime Minister Mario Monti of Italy, who were scheduled to hold a press conference later Thursday in Rome.

In afternoon trading, the yield on Spain’s 10-year government bond rose 19 basis points to 6.87 percent, having reached a euro-era record of 7.0 percent earlier. The Italian 10-year traded to yield 6.22 percent, up 3 basis points. A basis point is one-hundredth of a percent.        

European officials, fighting to contain the euro crisis, fear Italy will become the next country to fall under market attack. Even as they work to prevent further contagion, the world’s eyes are turning to elections Sunday in Greece, where fractious parties are angling for supremacy in a contest that is being treated by many as a referendum on the country’s euro zoneMoody’s cut Spain’s sovereign bond rating by three notches, to Baa3 from A3, late Wednesday, citing the pressure on government finances from the bailout deal made over the weekend and Spain’s “growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from” the European Central Bank.

Underscoring a point made by many economists who say Europe’s austerity focus has gone too far, and that the emphasis now should be on reviving growth, Moody’s noted in its downgrade of Spain’s rating that the country’s stagnating economy “makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.”

The Spanish government did not comment Thursday on the downgrade, which followed a similar move by Fitch Ratings on June 7.

The terms of Spain’s bailout are yet to be negotiated. Still, just days after the weekend deal, tensions are building up between Madrid and Brussels over what its consequences will be.

On Wednesday, Joaquín Almunia, Spain’s representative in the European Commission, told Reuters that Spain would be likely to have to liquidate one of three troubled banks in which the state has had to intervene and that have failed to find any buyers — Catalunya Caixa, Banco de Valencia and NovaCaixaGalicia. Luis de Guindos, Spain’s economy minister, however, repeated this week an earlier government pledge that the government did not plan to shut any financial institution.

Moody’s also cut its credit ratings for Cyprus’s government bonds, and put them on review for further possible downgrade. The cut, by two notches to Ba3 from Ba1, takes Cyprus’s debt rating more deeply into junk territory. Moody’s cited the increasing likelihood that Greece — to which Cypriot banks are heavily exposed — would exit the euro area, “and the resulting increase in the likely amount of support that the government may have to extend” to the banks.

Cyprus, a tiny Mediterranean island-nation, is expected to seek its own banking sector bailout this week.

The Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 0.7 percent, while the FTSE 100 index in London fell 0.9 percent.

Trading in U.S. index futures suggested that Wall Street was headed for a flat opening. The Standard & Poor’s 500 index fell 0.5 percent on Wednesday.

The dollar was mixed against other major currencies. The euro fell to $1.2551 from $1.2557 late Wednesday in New York, while the British pound fell to $1.5491 from $1.5505. The dollar fell to 79.32 yen from 79.49 yen, and to 0.9565 Swiss francs from 0.9564 francs.

Asian shares were lower across the board. The Tokyo benchmark Nikkei 225 stock average fell 0.2 percent. The Sydney market index S.&P./ASX 200 fell 0.9 percent. In Hong Kong, the Hang Seng index fell 1.2 percent. 


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