Spain bonds nearing critical 7 percent mark

A Spanish flag flies over a military building with a symbol of the Franco era in Barcelona Thursday Oct. 11, 2007. Statues, street names and other symbols honoring Gen. Franco and his 40-year rule would be eliminated under a bill, presented by ruling Socialist Party, that seeks to make amends to victims of the Spanish Civil War. (AP Photo/Manu Fernandez) AP

(MoneyWatch) Spanish bond rates continued to rise today, hitting the highest level since the financial crisis began and perilously close to the critical 7 percent mark. Italy's bond rates also rose to dangerous levels. The increases were fueled over growing doubt about a bailout plan for Spain's banks and the upcoming Greek elections.

At mid-day, the Spanish 10-year note was trading at 6.8 percent. Ireland, Greece and Portugal all asked for an international rescue when their interest rates hit 7 percent. In another worrying sign Spain's 5-year bonds are not that far behind the 10-year rates, trading at 6.15 percent at mid-day.

Concern over Spain's deteriorating condition is also driving up Italy's 10-year bonds, which were at 6.17 percent mid-day. When Spain's rate hit 6.2 percent a week ago Budget Minister Cristobal Montoro said Madrid had been effectively shut out of the international bond markets.

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The rises reflect increasing investor concerns about this weekend's bailout deal for Spanish banks. The $125 billion loan is supposed to recapitalize the nation's banking system which has been devastated by the collapse of a real estate bubble. No sooner had the loan been announced that analysts began voicing serious doubts about it.

The loans are guaranteed by Madrid, but the investors were already worried about the nation's ability to repay the debt it already had given Spain's increasingly desperate economic situation. Its general unemployment rate is over 23 percent. For people 25 and younger it is near 50 percent. Today Fitch Ratings said the nation will "significantly" miss its budget deficit targets. This comes despite severe budget cuts which have devastated Spain's social safety net.

Also, no one knows yet if the loan will be large enough. That won't be known until an independent audit of Spain's banks is completed at the end of the month. An additional concern is where the money will come from. If the funds come from the new European Stability Mechanism fund, its bond repayments will be given a higher priority than everyone else's -- meaning other debt would be less likely to be paid off.

While Spain has been able to sell bonds recently, rates have increased each time. Also, a large percentage has been bought by Spanish banks - adding to their financial instability.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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