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Bond markets turn up the heat on Spain and Italy

Some of Europe’s largest economies will find it tougher and tougher to survive without a crippling bailout…

Silvio Berlusconi won't want to look at how the markets are pricing a loan to his government.
Silvio Berlusconi won't want to look at how the markets are pricing a loan to his government.
Image: Gregorio Borgia/AP

SOME OF EUROPE’S largest economies will find it more and more expensive to borrow money on the open markets, after their bond yields rocketed despite Italy’s massive austerity plan and the results of banking stress tests.

The measures passed by the Italian parliament on Friday totalled some €48bn in spending cuts, and last week’s stress tests discovered that only eight European banks would be threatened if the downturn got worse.

But even though Italy’s moves mean it will now need to borrow far less cash in the coming years, the markets are still placing a high premium on having to lend to the country.

Spain, meanwhile, is also paying the price for the poor performance of its local banks – which, like Ireland’s did, will probably need a public bailout in order to meet the criteria laid down by the stress tests.

The market price for Spanish 10-year bonds – that is, if Spain were to borrow money now, and agree to repay it in a decade – it would pay a massive 6.3 per cent for the privilege.

That rate has risen significantly today – up by over a quarter of a percentage point – as the markets freeze Spain out of the markets, believing that loans to Spain might never be repaid.

For Italy, meanwhile, borrowing costs breached the 6 per cent barrier this lunchtime, for the first time since the Euro was introduced – as markets also steer clear of the prospect of loaning to Silvio Berlusconi’s government.

It would therefore be cheaper for either country to enter a bailout, and pay the same 5.83 per cent interest that Ireland is paying, than to borrow from the open market.

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By comparison, Europe’s strongest economy Germany would pay a mere 2.63 per cent for its own borrowing.

More in Europe: Merkel throws down gauntlet to bondholders over Greek bailout >

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Gavan Reilly

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