Spain moves into bailout territory

Updated: 
Euro notesSpain's economy moved closer to the rocks as the country's borrowing costs surged into so-called bailout territory for the first time since the euro was formed.

The yield on its 10-year bonds spiked past 7% after a key ratings agency warned that Spain's debt could be downgraded to junk status in the next three months.

The warning from Moody's pushed the interest rate to the same unsustainable level that forced Greece, Ireland and Portugal to take a bailout from the European Union.

The soaring yield is a sign that investors have little confidence in Spain's ability to repay its finances and have not been won over by a plan to pump nearly 100 billion euros of EU cash into its beleaguered banking sector.

The ongoing crisis weighed on equity markets with the FTSE 100 Index in London falling nearly 1%, while Germany's Dax and the Cac-40 in France also fell into the red.

In the UK, an over-subscribed debt auction on bonds running until the year 2060 raised £1.5 billion, with investors demanding an interest rate of 3.2%.

The worsening situation in Spain comes ahead of Sunday's crucial election in Greece, which is being viewed by many as a make or break moment for the eurozone.

Success for an anti-austerity party like Syriza could ultimately lead to Greece leaving the euro, while wins for pro-bailout groups will see years of harsh spending cuts imposed on its people.

Meanwhile, Italy saw its borrowing costs rise at a debt auction. The country paid 5.3% interest rates on three-year bonds, up from 3.91% last month. However, the sale was fully subscribed showing good demand for Italy's debt.

Chris Beauchamp, market analyst at IG Index, said: "Spain and Italy might not be Greece, but neither are they Germany, and everyone is rightly worried that both nations are headed towards bailouts of the kind seen in Greece and elsewhere."

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