Spain took another lurch towards the financial abyss yesterday as fears of a full-scale bailout sent its borrowing costs soaring and shares across the world tumbling.
The deepening recession and rising threat of bankruptcies among Spain's struggling regions is forcing Madrid to pay as much as 7.45 per cent to borrow for 10 years, the highest since the birth of the single currency in 1999. At these levels – well beyond the 7 per cent mark which forced Greece, Ireland and Portugal to seek an international rescue – the nation will struggle to last more than a few months.
Panicky investors also dumped debt in Italy – seen as another potential Eurozone casualty – and shares, in favour of safe German and UK bonds. Spain has already been forced to prop up its debt-laden banks with €100bn (£78bn) from Europe's rescue funds but there are mounting fears in the City that the nation will need even more help to avoid a financial cataclysm.
Cantor Index's David Buik warned: "There is momentum behind the thinking that Spain will require an official sovereign bailout, which may turn out to be hundreds of billions of euros. Greece's financial problems look like a vicarage tea-party in comparison to Spain's fiscal black hole."
Spain's main stock market fell as much as 5 per cent at one point, forcing regulators to step in with a temporary ban on short-selling, where investors make money by betting on falling share prices.
London's FTSE 100 fell more than 2.1 per cent or 117.9 points to 5533.87, the lowest since the end of June. Wall Street was also sucked into the sell-off as the Dow Jones Industrial Average slid more than 1 per cent.
The latest turmoil comes barely a month after the Eurozone leaders agreed a package of measures to shore up confidence. Spain's Prime Minister, Mariano Rajoy, also unveiled an extra €65bn in spending cuts and tax hikes two weeks ago to convince markets that his centre-right administration can put public finances back on course.
But his task has been made harder by the nation's deepening recession as the economy shrank 0.4 per cent between April and June. It is set to continue into 2013 as Spain – saddled with an unemployment rate above 24.4 per cent – struggles to find the growth it needs to bolster tax revenues and cut the deficit.
Fears are rising, meanwhile, that more of Spain's cash-strapped regions will also seek a bailout from Madrid after Murcia and Valencia called for financial help. Experts said the European Central Bank needed to extend more cheap loans to banks or intervene directly in debt markets to ease the pressure on Spain and Italy – moves likely to be opposed by Germany.