Belfast Telegraph

Now Spain feels the heat

Sceptical markets hike loan rate for Madrid

Worries about Spain's finances are intensifying as the country's bond yields on international markets rose despite expectations of a new austerity measures.

The yield on 10-year Spanish bonds in the secondary market rose to 5.81% from 5.74% when the Easter break began late last week.

The difference between Spain's yield and that of the benchmark German bund was 4.11%, the highest since the new government took power in December.

The increase in the yields was due to wariness over Spain's ability to cut debt as well as a drop of confidence in wider global financial markets following weak US economic data.

When international investors are concerned about global growth, they pull back from risky assets, such as Spanish government bonds.

Spain is under intense pressure to show that it can rekindle economic growth and cut its budget deficit to avoid becoming the next eurozone country to need a bailout.

The unemployment rate is at nearly 23% and the economy is back in recession, being due to contract by 1.7% this year, according to the Bank of Spain.

On Monday evening, the government announced another €10bn (£8.2bn) in savings on education and health spending as well as an accelerated programme to sell off companies in which the state holds majority stakes.

Economy minister Luis de Guindos (left) insisted that market volatility and rising bond spreads would not cause the government to "veer off course" as it undertakes painful reforms.

"The government knows how to get through the current difficult situation," he told a business breakfast audience.

The new centre-right government has committed to the ambitious task of reducing the budget deficit from 8.5% of GDP last year to 5.3% this year and 3% in 2013.

Last month, the government unveiled an austerity budget with €27bn (£22.2bn) in tax rises and spending cuts this year.

But the blueprint has still to make its way through parliament and is not expected to be passed until June.

Finance minister Cristobal Montoro said that one of the goals of the savings measures announced this week is to crack down on what he called "abuses" in the health care system such as other Europeans visiting Spain to use its health care services or subsidised prescription medicine.

He told Spanish National Radio that the reform of the health care system would be ready in two weeks. It has to be discussed with the 17 semi-autonomous regions which receive money from the central government but have jurisdiction over how health and education money are spent.