Spain reels under mounting cost of borrowing as huge EU bailout looms
The prospect of a multibillion-euro bailout for Spain has increased as the country's borrowing costs soared on fears over its beleaguered banking sector.
The yield on Spanish 10-year bonds rose to 6.6% - close to levels which pushed Greece, Portugal and Ireland into taking financial support from the EU.
Spain's woes snowballed as a plan to shore up the finances of its troubled lender Bankia by indirectly tapping the continent's central bank for support was rejected.
The escalating eurozone crisis spooked investors as London's FTSE 100 Index lost nearly 2% of its value, while Germany's Dax and France's Cac-40 nearly lost 2% apiece.
Chris Beauchamp, market analyst at IG Index, said: "Without wishing to sound apocalyptic, it does feel as if Spain is gradually shuffling towards the abyss."
But there was some positive news for the region after the European Commission said it was prepared to come to the beleaguered economy's aid.
EU Economic and Monetary Affairs Commissioner Olli Rehn (below) said he would offer more time for Spain to reduce its budget deficit and also for it to use direct aid from a eurozone rescue fund to recapitalise distressed banks.
He said he was ready to give Spain an extra year until 2014 to bring its deficit down to the EU limit of 3% of gross domestic product if Madrid presents a solid two-year budget plan for 2013-14.
While markets initially spiked on the news, the gains were shortlived as investors felt such concensions wouldn't be enough.
As Spain's borrowing costs increased, the UK saw interest rates fall to record lows, with the yield on 10-year bonds sinking to 1.67%, reflecting the confidence investors have in the UK's ability to cope with its debts.
And there was better news for the Republic yesterday.
A report from the European Commission said it has met all the economic conditions imposed on the country in return for its €85bn bail-out package - but the country still faces major challenges.
In the document on the performance of all member states under increased monitoring powers in the wake of the economic crisis, the Commission says Ireland met its fiscal deficit target last year, beat its targetfor cutting bank debt, and returned to "modest" growth.
But the country still faces unemployment of 14.3% this year and it is exposed to risks in the rest of the euro area.