Spanish borrowing costs hit their highest levels in the history of the single currency yesterday, after a deal by eurozone ministers to bail out the country's ailing banks failed to calm market fears.
The yield on 10-year Spanish government bonds closed at 7.28 per cent, up 24 basis points over the day, as concerns rose that the conservative government of Prime Minister, Mariano Rajoy, would ultimately have to apply for a full sovereign bailout. Fears about Spain pushed the euro down to its lowest level against the US dollar in two years, at $1.214.
"This is the worst time for Spain since the eurozone crisis erupted. It's a self-fulfilling loss of confidence" said Nicholas Spiro, of Spiro Sovereign Strategy. The heavily indebted eastern region of Valencia said it would seek financial help from Madrid, which will add to the pressures on Spain's public borrowing.
Spain is in the midst of a double-dip recession, as the economy continues to reel from the bursting of a huge construction bubble and banking crisis.