Spain’s borrowing costs have reached record levels following yesterday’s downgrade by Moody’s.
The yield on 10 year bonds climbed to just above seven per cent this morning, a level considered untenable over the long term by many analysts and a new euro-era high for Spain.
The rate fell back later in the morning. Greece, Portugal and Ireland were all required to seek a bailout after there ten-year borrowing costs rose above seven per cent.
The yield breached the psychologically important seven per cent barrier after the German Chancellor, Angela Merkel again refused to sanction Germany to rise to the rescue, despite increasing pressure from global leaders.
There is a hopeful precedent for Spain. Italy's ten-year borrowing costs also went above seven per cent briefly in November 2011, before falling back and not breaching that level again so far.
Ms Merkel told the German Parliament that Europe must seek closer fiscal ties.
"It is our task today to make up for what was not done and to end the vicious circle of ever new debt, of not sticking to rules.
"I know that it's arduous, that it's painful, that it's drawn-out. It's a Herculean task but it is unavoidable," she said/
Earlier in the week, Moody’s slashed the Spanish rating from A3 to BAA3, just one notch above 'junk'.
At the weekend, Spain agreed a €100 billion bank bailout package with fellow Eurozone members which, it had been hoped, would soothe the markets and ease borrowing costs.
But Moody’s has claimed that the bailout will add to the Spain’s debt – and warned that it might downgrade the country even further over the next three months.
If Spain is cut to junk status, some investors would be forced to sell the country’s bonds, driving yields higher.
Meanwhile, Moody’s also cut the Cypriot credit rating by two levels, from BA1 to BA3, just days ahead of fresh elections in neighbouring Greece.
There are fears that Greece may have to quit the Euro depending on the outcome of the polls and there has been a run on the bank in the past few days, with people stockpiling pasta and canned food.
The election is believed to be a closely-fought race between pro-bailout conservatives and a radical left party vowing to scrap austerity measures.