Euro fears rising again

MADRID – Borrowing rates for Spain and Italy rose to distressing levels again Friday, signaling a resurgence in concern over Europe’s debt crisis just one week after markets cheered leaders’ decision to help financially weaker states.

The rate, or yield, for the Spanish 10-year bond was up 0.22 percentage points to 6.96 percent by early afternoon in Madrid. That level is deemed unsustainable over the long term and could push Spain to seek a full-blown bailout like Greece, Ireland and Portugal.

Italy’s equivalent rate was up 0.13 percentage points to 6.01 percent. In comparison, Germany’s bond – seen as a safe haven for investors – was commanding a yield of just 1.37 percent.

Both Spain’s and Italy’s yields fell sharply earlier this week in a wave of euphoria after European leaders agreed to channel aid directly to troubled banks, without further burdening a country’s debt. They also agreed to make it easier for countries to get rescue loans and for the European bailout fund to buy bonds from other investors, which would lower countries’ borrowing rates.

The summit decisions were generally seen as a step in the right direction in the resolution of the crisis, but the feeling is that more needs to be done – and faster.

“The optimism following last week’s EU leaders’ summit is fading as concerns over various aspects of the agreement creep in,” wrote Elisabeth Afseth and Brian Barry, fixed income analysts at Investec financial services, in a note to clients.

One key concern is that the European bailout fund will not be big enough if Spain or Italy needed rescue loans for their governments.

But European leaders have given no sign that they intend to increase the bailout fund’s lending capacity. In fact, smaller eurozone countries like Finland have been complaining about the cost of the rescue operations.

The bond rates for Spain and Italy began inching up Thursday, when the European Central Bank gave no indication that it would take more emergency action to ease eurozone government borrowing rates. The ECB has in the past bought the government bonds of financially weak countries like Spain and Italy and also flooded banks with cheap loans. Those measures helped bring borrowing rates down, but only for a few months at a time.

“Slowly the optimism after the last EU summit seems to be vanishing and reality is setting in with weak growth, high debt levels and unemployment once again in the spotlight,” said Markus Huber, of ETX Capital financial services.