Wednesday, September 26, 2012

Rebellions Erupt in Spain Over Imposition of Austerity

September 26, 2012, 7:39 p.m. ET

Spanish Scare Roils Europe Markets

Madrid's Borrowing Costs Rise as Investors Fear It Will Delay Bailout Request; Exchanges
Wall Street Journal

Spain's borrowing costs rose and its stock market fell sharply on the eve of Madrid's announcement of new austerity measures, putting the shaky economy again at the center of Europe's race to preserve its currency union.

Spain's benchmark IBEX-35 index fell 3.9% and other European exchanges posted losses as well. The government's 10-year borrowing costs rose nearly one-third of a percentage point, to above 6%, placing renewed pressure on Madrid to find a way out of its debt crisis and appearing to crimp its prospects for avoiding a bailout from its euro-zone partners.

The euro fell to a two-week low against the dollar. Interest rates for Italy, whose government is also burdened by high borrowing costs, also rose.

Antiausterity demonstrations continued for a second day in Madrid, after protests turned violent in front of the Spanish Parliament on Tuesday. In Athens, too, tens of thousands of demonstrators took to the streets against anticipated budget cuts.

Wednesday's market moves marked a sharp correction to the boost delivered by European Central Bank chief Mario Draghi's promise on Sept. 6 to buy bonds of euro-zone governments that request bailouts and submit to economic-reform programs. Like previous relief rallies that came after European leaders announced new crisis-fighting measures, the so-called Draghi Effect has also continued to dissipate.

The ECB's early September announcement lifted the sense of impending crisis in the euro zone, and Spain's borrowing costs fell. That raised concerns among officials and analysts over whether its move was lifting pressure on debtor countries like Spain to take action and on creditors such as Germany to make concessions that are necessary to heal the failings in the currency union.

Comments by Spanish Prime Minister Mariano Rajoy on Tuesday fanned concerns that Madrid would procrastinate in requesting a rescue package from the euro-zone bailout fund, analysts said. In an interview with The Wall Street Journal, Mr. Rajoy said Madrid would surely ask for help if Spain's borrowing costs remain "too high for too long."

Some predicted that the spreads between Spanish bonds and lower-risk German bonds would continue to widen if Madrid fails to move. "As long as the government refrains from asking, we will see Spanish spreads widen. The market will push Spain into asking for a bailout," said Alessandro Giansanti, a senior interest-rate strategist at ING.

Mr. Rajoy's government has a new chance to shore up investor confidence in the economy when it announces its 2013 budget plan on Thursday, together with other changes aimed at improving the way the economy functions. Analysts said investors will be watching the announcements as an indication of whether Spain is laying the groundwork for a bailout request.

Wednesday's general pessimism was compounded by a report from the Spanish central bank, which said the recession-bound economy continued to contract at a significant rate in the third quarter.

Another blow to Spain was delivered Tuesday as finance ministers of Germany, Netherlands and Finland cast doubt on whether the government would, after all, be able to shift the burden of bank bailouts to the region's bailout fund.

Such a hope had been fostered by a declaration at a June European summit that leaders intended to break "the vicious circle" caused by weak governments having to shore up the finances of shaky banks. But in Tuesday's joint statement, the three finance ministers said the new bailout fund should directly recapitalize banks only for new problems. The three ministers said national governments should continue to be responsible for resolving so-called legacy problems created by past bad lending decisions.

Also Tuesday, Artur Mas, Catalonia's powerful leader, announced in Barcelona that he will call early elections there on Nov. 25, which observers see as a move by Mr. Mas to strengthen his bid for more autonomy for the wealthy northeastern region.

"Political turmoil in Spain's richest region could generate the kind of market reaction that would precipitate a request for European support by Madrid," said Deutsche Bank analyst Gilles Moec.

Spain's borrowing costs rose Wednesday across the board as bond prices slumped. The yield on 10-year bonds rose 0.31 percentage point to 6.09% and yields on two-year notes, which had been particularly buoyed by the ECB's pledge to buy bonds of up to three years' maturity, climbed 0.28 point to 3.52%. Italian 10-year yields rose 0.11 percentage point to 5.22%. For both countries, the yields remained lower than before the ECB made its commitment to act.

The euro dropped decisively below $1.29, and stayed there throughout the day. All of Europe's major stock markets sunk: London's by 1.56%, Germany's by 2% and France by 2.8%.

On Friday, the government will provide a final estimate on the capital needs of the country's ailing banks, as required under terms of the credit of up to €100 billion ($129 billion) granted by the euro zone to the government earlier this year.

Spanish officials have said the final number will be slightly below a €62 billion initial estimate, and that the banks could end up needing even less than that because some will be able to raise the funds on their own. A planned state-run "bad bank" that will hold questionable loans will further reduce capital needs.

Such a result could cheer investors, said Ben May, analyst at Capital Economics. "Not only would this be good news for the Spanish public finances, it would also leave the [euro-zone] bailout facilities with more firepower to tackle the region's other problems," he said.

Mr. Rajoy's government has committed itself to reduce a budget deficit of nearly 9% of gross domestic product in 2011 to 6.3% in 2012 and to 4.5% in 2013.

—Tommy Stubbington contributed to this article.
Write to Stephen Fidler at and Jonathan House at

A version of this article appeared September 27, 2012, on page A10 in the U.S. edition of The Wall Street Journal, with the headline: Spanish Scare Roils Europe Markets.

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