Madrid reels again as borrowing costs hit highest level for a decade


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The Independent Online

The beleaguered Spanish economy took another blow yesterday as the country's borrowing costs soared to its highest level for a decade and the Madrid stock market briefly sank to a nine-year low.

As the markets gyrated, Spain's Economy Minister Luis de Guindos was forced to deny the existence of secret government plans to bailout the troubled lender Bankia by using government bonds.

Yields on Spanish 10-year bonds peaked at 6.67 per cent,before falling back to 6.55 per cent, only slightly further away from the 7 per cent "point of no return" where other countries have asked for an international bailout.

Mr de Guindos flatly denied a Financial Times report that claimed the European Central Bank had rejected a plan for Spain to pay for a €19bn (£15bn) bailout of Bankia, the country's fourth-largest bank, with government bonds.

Speaking during a Parliamentary debate, Mr de Guindos said such a plan did not exist, adding, "pay more attention to the government and less to the Financial Times". An Economy Ministry official later told Reuters that "the first option [is] to go to the markets to recapitalise the entity". Shares in Bankia fell to just 0.95 cents.

Amid the gloom in Spain, there was one piece of possible good news yesterday: the EU promised to consider a one-year extension on the requirement to bring the government's budget deficit, currently at 8.9 per cent, down to 3 per cent of GDP by 2013. In exchange though, Spain will have to produce what EU economics commissioner Olli Rehn called a "clear budget plan" and cut back on "excessive spending". If Spain's deficit plans fall short of their targets – adapted or otherwise – the Bank of Spain governor Miguel Angel Fernandez Ordonez, who is due to step down a month earlier than expected, has said he thinks a planned rise in VAT in 2013 should be brought forward a year.

The ongoing eurozone problems were not restricted just to Spain yesterday as three new polls painted a confusing picture of what might happen in Greece ahead of next month's election, which may decide whether or not Greece remains in the euro. Of three polls published, one showed Greece's biggest pro and anti-bailout parties, New Democracy and Syriza, in a dead heat, Reuters reported. Another put New Democracy ahead and a third suggested that the leftist Syriza party would win if elections were held now.