Yesterday bond yields in Spain went above monetary union records reaching over 400 points prompting fresh concerns that Spain will require a bailout by the European Union. A similar situation in Italy has set alarm bells ringing in the markets with fears that both Italy and Spain will be unable to repay their debts ending up in a similar situation to that of Greece.
Bond yields are regarded as a measuring tool for the state of the economy and the record breaking levels on their 10 year interest rates both in Italy and Spain came as a surprise yesterday. Berlussconi has called an emergency meeting of ministers and those with the highest responsibility for the economy and the Spanish Prime Minister, José Luis Rodríguez Zapatero has been forced to postpone his holiday plans in order to deal with the unfolding crisis.
Chantal Hughes the spokesperson for the European Commission has defended the austerity measures introduced by the Spanish government in order to control its budget deficit and has rejected the possibility of Spain requiring a bailout.
However, this has not altogether calmed fears because similar declarations were made before the Greek, Irish and Portuguese economies had to be rescued.
Fears over whether Spain or Italy, both key members of the Eurozone, will need a bailout will continue if bond yields continue to be high over a period of time. Market fears over whether a country’s economy is on the verge of collapse are based on bond yields and more importantly when the interest rate on its 10 year bonds rise above 7%. the current interest rate on Spanish 10 year bonds has now reached 6.45% and 6.14% in Italy. According to García Pascual the situation of the Spanish economy is seen as ‘very serious because it is not something that can be addressed in the short term’.