Concerns over Spain's economy and fears that it might eventually be heading for a bailout pushed the country's borrowing costs in the world's financial markets higher on Friday.
Analysts blame Spain's rising borrowing costs on doubts that the new conservative government is committed to meeting deficit reduction targets. The markets are also concerned that a global economic slowdown will push Spain's to seeking a bailout package from the European Union or the International Monetary Fund.
The yield _ the interest rate Spain would have to pay on its debt _ for the country's 10-year bonds hit 5.51 percent during the day on Friday after rising all week. In early March, the yield was just below 5 percent. At the moment, there is a 3.54 percentage point difference between the Spain's yield and that of Germany, the strongest economy in the 17-country group that uses the euro as its currency.
There is concern in the markets that the rising yields could herald a rerun of the last months of 2011, when worries over the fate of Greece and bailouts for Portugal and Spain spread to other much larger eurozone economies. At the height of the crisis, borrowing costs for Italy and Spain on bond markets hit highs that would have been unsustainable without a bailout.
New austerity-minded governments in Rome and Madrid helped calm fears, but of far greater impact was the European Central Bank's decision to flood the market with more than (EURO)1 trillion ($1.3 trillion) in bargain-basement loans. This injection spurred banks to snap up battered government debt, driving Spanish and Italian borrowing costs down. Economists warn that such relief is only temporary.
For the past two weeks, Spain has had a higher yield than Italy, which just months ago was thought to be the economy most at risk following the bailouts of Greece, Ireland and Portugal. On Friday, the Italian 10-year yield was 0.4 percentage points below Spain's at 5.14 percent.
On its own, Spain has a eurozone high unemployment rate of nearly 23 percent and first quarter figures are expected to show the economy has slipped into its second recession in three years.
But speaking to reporters Friday in Singapore, Economy Minister Luis de Guindos described comparisons with bailed-out Greece as "total nonsense" and said that Spain will stay on track to meet its deficit target of 5.3 percent for 2012.
The government's maneuver to opt for 5.8 percent deficit target instead of the 4.4 percent it originally promised its partners in the euro was cooly received by markets. Irked by the bid, the EU eventually obliged Spain to settle for 5.3 percent.
Analysts also say the government's apparent decision to hold off on further reforms and its much awaited 2012 budget so as not to jeopardize the ruling Popular Party's victory chances in a regional election Sunday has not inspired confidence.
"Spain is seen as playing a cat-and mouse game and not fulfilling its commitments," said Javier Flores, an analyst with Asinver investment group.
Echoing some international analysts this week, Flores said that the risk of default was real and pointed out that British consultants CMA has Spain at No. 9 in the list of top 10 countries most at risk of default.
"Spain is almost certain to miss the deficit target and the possibility of a default right now is almost equal to that of Egypt," he said.
"People here just don't realize just how urgent and serious the situation is," he said, adding that much will depend on how the budget is perceived when presented next Friday.