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Graham Hughes/Photocall Ireland

Spanish debt sales cause Euro to weaken

Spain’s 10 year bond yields have traded above six per cent for a second day as the country prepares for bond auctions on 12- and 18-month bills.

THE EURO HAS weakened ahead of Spanish debt sales today.

Reuters reports that the euro weakened and German government bond prices lowered from their record highs as Spain prepares to sell some of its short-term debt.

The Guardian reports today that a Rabobank strategist said the country is “back in full crisis mode” and it is looking likely Spain will have to have a bailout of some form.

The interest rate on Spanish government bonds rose sharply yesterday, a sign that investors are becoming more worried about the country’s ability to afford mounting debts as its economy shrinks.

The rate, or yield, on the country’s 10-year government bonds jumped to 6.10 per cent on the secondary market, the highest since the country’s new conservative government under Prime Minister Mariano Rajoy took office in December.

The 10-year bond yield surged toward 7 percent late last year, a level considered unsustainable for a country over a long period.

Although the administration has implemented a barrage of labour and financial reforms, investors remain worried about Spain because the country’s banks are weighed down by a mountain of bad loans from the collapse of the property market in 2008, and many of its 17 regional governments have overspent wildly.

Spain is expected to enter its second recession in three years this quarter. The unemployment rate is nearly 23 per cent.

The jump in Spain’s yield comes at the beginning of a week in which the country’s Treasury holds two rounds of bond auctions — 12- and 18-month bills on today, and benchmark 10-year bonds on Thursday.

The government insists it will have no trouble financing itself this year and that auctions held so far this year have gone well. But that changed almost two weeks ago, when a medium-term debt auction hit the bottom end of what the Treasury targeted, triggering the latest increase in yields and placing Spain firmly back into the center of the eurozone debt crisis.

The situation was not helped by government-released data on Friday showing the country’s troubled banks borrowed a record €316.3 billion from the European Central Bank in March.

Spain will probably step in and take over the finances of one or more of the country’s debt-crippled regional governments before the end of the year, a senior Spanish government official told reporters yesterday.

Economy Minister Luis de Guindos will meet ECB President Mario Draghi today.

- Additional reporting by AP

Read: Spanish bond yields pass 6 per cent>

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