Europe debt fears pile pressure on Spain, others

Europe's debt crisis cast its gloom over larger countries like Spain on Tuesday as investors sold off government bonds on worries that the common-currency region will be strained by more expensive bailouts.

The yields on Spain's 10-year bonds jumped as high as 5.7 per cent - a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond - before easing to 5.5 per cent on the close.

The spread on Italy's equivalent bond also reached the highest since the 1999 launch of the euro, before falling back somewhat. Portugal's bond yields, which soared last week, eased slightly but remained near record highs of seven per cent.

"Ireland's bailout package has clearly failed to stop the rot in the eurozone markets and if anything it has focused attention on other countries in the periphery," said Mitul Kotecha, analyst at Credit Agricole CIB.

The continued market turmoil "will come as a bitter blow to European officials who had hoped that it would help to turn sentiment around," he said.

Jose Manuel Campo, economy secretary at the Spanish finance ministry, sought to ease tensions and described the market reaction as "disproportionate".

He said investors' lack of confidence "is poorly justified and based on a short term analysis," pointing out that there were major differences between Spain and Greece, Ireland or Portugal.

The Irish bailout's immediate focus is injecting €10 billion into cash-strapped banks out of a total of €67.5 billion ($89 billion) in loans at 5.8 per cent interest under a EU-IMF facility.

As a condition, Ireland will have to use €17.5 billion of its own cash and pension reserves to shore up its public finances.

Spain and Portugal, deemed the next weakest links in the eurozone economy, have continually denied they will need outside help but investors have become increasingly skeptical that the series of bailouts will stop.

Hurting state revenues

At the heart of the problem is that the austerity measures these countries need to take to reduce their deficits threaten to backfire by weakening economic growth and hurting state revenues. That is what's happening in Greece, which has been able to drastically cut its spending but is struggling to raise tax income as economic and corporate activity wilts.

"It is clear that the market is aware of the tightrope that 'peripheral' governments are walking," said Neil Mellor, currency strategist at Bank of New York Mellon.

Portugal's central bank warned Tuesday that the financial system is facing "serious challenges," as foreign concerns about public, private and corporate debt have made it harder for Portuguese banks to raise money on international markets.

Continuing to request financing from the European Central Bank is "unsustainable," the central bank warned, saying banks should adopt a commercial policy of encoura-ging saving to ensure their liquidity.

- AP