The government of Prime Minister Mariano Rajoy came under increased pressure on Monday as the country risk premium continued to escalate to the highest levels seen since he took power at the end of last year.
Despite a series of reforms, including a drastic overhaul of the laws governing Spain’s labor market, and a draconian austerity drive, investors are starting to question whether the Rajoy administration can deliver on its budget-reduction pledges at a time when the economy is heading for another recession.
The yield on the Spanish 10-year government bond moved above the six-percent mark, raising the specter of how relentless pressure by the markets drove first Greece, then Ireland and Portugal into the tutelage of the International Monetary Fund and the European Commission. That drove the spread with the benchmark 10-year German government bond to 443 basis points after opening Monday at 424, before easing by the close to 435 basis points.
Credit default swaps (CDS) — a form of insurance against non-payment) — on Spanish government debt hit record highs of 521 basis points before also coming off its highs by the close.
If we don’t achieve our deficit target, the rest won’t matter; we won’t be able to fund our debt,” said Rajoy
The Spanish Treasury faces two debt auctions this week: of 12- and 18-month bills on Tuesday and of two- and 10-year bonds on Thursday.
The blue-chip Ibex 35 index closed down 0.57 percent at 7,209.10, its lowest level since March 2009.
Speaking at a conference in Madrid, Rajoy reiterated that his government’s main concern is to bring the budget deficit down from 8.5 percent of GDP last year to 5.8 percent this year. He will have to achieve this when the economy is expected to contract 1.7 percent.
“If we don’t achieve this, the rest won’t matter; we won’t be able to fund our debt,” Rajoy said.
The Popular Party leader underscored his administration’s faith in the euro. “Nobody, neither governors or institutions, both inside and outside this country, should doubt, or cast doubts on Spain’s commitment to the euro and European political integration.”
While Rajoy was vainly trying to talk up the markets, his economy minister, Luis de Guindos, was meeting in Paris with a group of French investment bankers to convince them of the country’s solvency and the merits of its reform drive. De Guindos will convey the same message in meetings with German bankers in Dusseldorf and Frankfurt.
The European Central Bank revealed Monday it did not purchase any more euro-zone government bonds in the period April 4-11. ECB executive board member Benoît Coeuré last week suggested the bank could reactivate its bond-buying program, providing some temporary relief last week for the Spanish financial markets.