Markets and euro hit as crisis deepens
by Daniel Mason
Growing fears that Spain will need a full sovereign bail-out, and renewed doubts about Greece's ability to meet the conditions imposed by international lenders, have spooked markets as new figures showed public debt continuing to rise across the eurozone.
The yield on Spanish 10-year bonds rose to 7.5 per cent and the euro fell to an 11-year low against the yen today amid concern that more of Spain's regions may be forced to seek bail-outs from Madrid. Stock markets across Europe were down an average of 1.5 per cent this morning.
Last week Valencia asked the central government for financial help and speculation is growing that others – including the two largest, Catalonia and Andalucia – will follow. The funding needs of its regions makes it more likely that Spain itself will eventually require a full international bail-out on top of the €100bn bank rescue package it has already been granted by fellow eurozone countries. However, finance minister Luis de Guindos insisted today that Spain would "absolutely not" need a full rescue package.
It comes as Spain's recession worsens. Today its central bank estimated that gross domestic product fell 0.4 per cent in the second quarter of this year, on top of a 0.3 per cent contraction in the first three months of 2012. Protests have been taking place across Spain against the latest €65bn of austerity measures put in place by centre-right Prime Minister Mariano Rajoy's government.
Meanwhile Greece is preparing for the return tomorrow of officials from the European Commission, European Central Bank and International Monetary Fund, who will assess its progress in meeting the conditions of its €240bn bail-outs. Yannis Stournaras, finance minister in the new coalition government that took over last month, has so far set out only €8bn of additional cuts out of an expected €11.5bn.
The troika's report will outline whether Greece has done enough to receive the next tranche of loans in September. Already behind on reducing its debt to 120 per cent of GDP by 2020, the Greek government, led by Prime Minister Antonis Samaras, had hoped to negotiate an extension to the deadline for meeting the terms.
But Germany's vice chancellor Philipp Roesler told ARD television yesterday: "If Greece doesn't fulfill those conditions, then there can be no more payments." And the German newspaper Der Spiegel reported that the IMF was considering blocking its next payments to Greece, because if the country missed its targets it would require between €10bn and €50bn of extra loans. Without the aid Greece will be insolvent.
Samaras said yesterday that Greece was going through "our version of the Great Depression". Greece's next challenge is making a €3.1bn bond repayment in August, mostly to the ECB.
Data published today by Eurostat showed that the government debt to GDP ratio across the 17-nation eurozone rose to 88.2 per cent in the first quarter of 2012, compared with 87.3 per cent at the end of last year. In the European Union as a whole, the debt to GDP ratio rose in 21 out of the 27 member states. Greece's debt was highest at 132.4 per cent, followed by Italy on 123.3 per cent.
In Italy, Prime Minister Mario Monti rejected reports that he would be forced to call early elections in the autumn, and said political parties continued to support his technocratic government. Monti's mandate runs until early next year. Today shares in Italian banks fell amid the concern about the general worsening eurozone crisis – with trading in shares in UniCredit, Intesa, Monte dei Paschi, Banco Popolare and Mediobanca suspended.
And after last week Monti warned that there were "grave concerns" that Sicily would default on its debts, Standard & Poor's has said it is suspending the region's credit rating because of a "lack of sufficient information". The rating agency affirmed Sicily's BBB+ score with a negative outlook, based on publicly available information.
But it added in a statement: "We subsequently suspended the rating because we lack sufficient information to maintain appropriate surveillance. The rating actions follow the recent public availability of information that leads us to believe that Sicily likely didn't meet our forecast expectations in 2012." Sicily has debts of about €5bn with annual interest payments of between €500m and €600m, according to Reuters.
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