Spain cleared a hurdle in the capital markets yesterday as it successfully issued new debt at an auction. But analysts continued to warn that Madrid's borrowing costs remain too high to be sustainable.
The Spanish government sold €2.5bn of two-year and 10-year bonds in a debt sale. The yield – or interest rate – on the 10-year bonds was 5.7 per cent, up from 5.4 per cent, when debt of that maturity was sold in February. The yield on the two-year debt was 3.46 per cent, slightly down on the 3.5 per cent it had to pay in October.
But markets remained concerned about the fiscal situation in Spain, with 10-year bond yields creeping up to 5.9 per cent in trading. Italian debt costs were also up, rising above 5.6 per cent. "Ten-year bond yields in both Spain and Italy are now above levels that can be sustained, given the weakened state of the countries' public finances," said Enam Ahmed, an economist at Moody's Analytics. A separate analysis by the credit rating agency Fitch showed that sales of repossessed properties in Spain have been recouping 48 per cent of the value of the original loans, fuelling fears about the potential losses of the country's financial institutions as the economy sinks into recession.
In Washington, the managing director of the International Monetary Fund, Christine Lagarde, continued her drive to raise new resources for the Fund, which could be used to backstop Spain and Italy should they need to be bailed out. Speaking at a news conference to kick off the spring summit of the IMF and World Bank, she said: "We expect our firepower to be significantly increased as an outcome of this meeting."
Ms Lagarde has so far secured commitments of $320bn, mainly from the European Union and Japan. She is believed to be aiming at between $400bn and $500bn in new commitments.
Describing the eurozone the "epicentre of potential risk" for a world economic recovery that is "timid and fragile", Ms Lagarde also urged European Union policymakers to inject some of their bailout funds directly into European banks.