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Europe teeters on the brink as Spanish, Italian borrowing costs rise

If it was borrowing today, Spain would pay 6.3 per cent interest for a 10-year loan – a level that can’t be sustained.

A punch-drunk Eurozone could yet be seeing stars if the cost of borrowing for Spain and Italy continues to rise.
A punch-drunk Eurozone could yet be seeing stars if the cost of borrowing for Spain and Italy continues to rise.
Image: UggBoy via Flickr

TWO OF EUROPE’S largest economies are inching further to requiring an international bailout, after the market price for government borrowing continued to spike in trading today.

The price of borrowing for Spanish 10-year bonds closed this afternoon at a near-record high of 6.282 per cent, while Italian 10-year borrowing would set that government back 6.129 per cent for each of ten years.

The ongoing price of borrowing for each country means that both is likely to be priced out of the markets whenever each government needs to go back to the markets and borrow from them – a realistic prospect given the budget deficits each is likely to run.

The difference in the cost of borrowing for each country when compared to that of Germany, considered a European benchmark, both reached new records for the lifetime of the Euro.

The growing concerns over the larger European economies hit the value of the euro, which slid by 0.25 per cent against the US dollar.

The debt crisis has forced Spain’s prime minister Jose Luis Zapatero to postpone a planned holiday to face off the growing debt crisis.

In Italy’s case, the higher cost of borrowing is a particular worry given the country’s staggering national debt. The country’s finance minister, Giulio Tremonti, is set to meet ECB chairman Jean-Claude Trichet tomorrow afternoon.

Germany, meanwhile, also saw its own bond yield fall below the rate of inflation for the first time since reunification – meaning German investors are now, apparently, willing to take a real-term hit in the value of their investments, simply to ensure that they get their money back.

The prospect of either Spain or Italy needing a bailout could mean more financial headaches for Ireland, which may have to pay out over €11.1bn to help fund their bailouts – despite already being in receipt of its own financial assistance.

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Gavan Reilly

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