FINANCIAL CRISIS

Benchmark bond yield hits new euro-era high

Merkel says Spanish bank bailout will come with strings attached

The financial markets on Tuesday continued to downplay Spain’s decision to seek a bailout for its banks in a bid to restore confidence in the banking system as the yield on the benchmark 10-year government bond hit a new euro-era maximum.

 The turbulence in the markets remained despite German Chancellor Angela Merkel despite praise for the reforms carried out by the government of Prime Minister Mariano Rajoy and his decision to seek European assistance to clean up the banks’ balance sheets, which she said was the “right” decision.

However, she underscored what her Finance Minister Wolfgang Schäuble and European Commission officials said Monday that the bailout would be accompanied by conditions. “There will, of course, be conditions for Spain (…) such as the restructuring of its banks to provide then with a viable future,” she said. “They will be different from those imposed in the case of an entire country having to submit its entire macroeconomic program to a rescue plan.”

The yield on the 10-year government bond closed at 6.71 percent after having at one point in Tuesday’s session moved above 6.8 percent for the first time since the euro came into being. That pushed the risk premium up 8 basis points to 528 basis points. The yields of other maturities also rose.

The stock market performed slightly better, with the blue chip Ibex 35 managing to advance a meager 0.09 percent at 6,522.50 points.

The 100 billion euros the state Orderly Bank Restructuring Fund (FROB) is expected to receive from the European Union will be at an interest rate of between three and four percent, but the EU commissioner for competition, Spaniard Joaquín Almunia, said in an interview Tuesday with the Spanish wire service Efe, that under EU rules, the FROB will have to charge the banks it passes funds to a rate of at least 8.5 percent.

 

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