Spanish bond yields hit record

Spanish bond yields hit euro-era highs today as rising scepticism over a €100 billion bailout for the country's banks drove investors away from Spanish debt, while world stocks dipped and the euro edged lower against the US dollar.

Spain's 10-year bonds extended their slump, pushing the yield up to a euro-era record as rating agancy Fitch said the government will miss its budget-deficit targets, casting doubt on prime ,inister Mariano Rajoy's plan to stabilise the economy.

The nation's 10-year yields climbed 28 basis points to 6.783 per cent, surpassing the previous high of 6.781 per cent, reached on November 17th.

Fitch also cut its long-term issuer default ratings on 18 Spanish banks, citing concern about further loan deterioration for lenders exposed to the construction and real estate industries.

German chancellor Angela Merkel, Germand finance minister Wolfgang Schaeuble and European Central Bank policy maker Joerg Asmussen will speak in Berlin today about the euro crisis.

Italian yields also rose as attention turned to the state of Rome's finances, with Austria's finance minister saying Italy may need a financial rescue because of its high borrowing costs. The statement drew a furious rebuke from the Italian prime minister.

Concerns that the Greek election on June 17th would bring to power parties opposed to its current bailout plan and force a disorderly exit from the euro zone were rekindled by a report that EU officials were considering ways to manage the fallout.

"There's no clear driver for markets until we get some clarity on Greece and the deal in Spain," said David Carter, chief investment officer at Lenox Wealth Advisors in New York. "We'll just drift higher and lower with no real conviction."

MSCI's world equity index edged 0.2 per cent lower and the FTSEurofirst 300 index of top European shares was also down 0.2 per cent.

The euro was trading near breakeven for the day versus the greenback, around $1.246.

"Investors will likely continue to sell the euro into strength, especially with Greek elections on Sunday and a European Union summit next week, which should be heavy in headlines," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "Any euro rally should prove short-lived."

The growing impact of the euro zone crisis on the economic outlook was underlined by data showing a surprise fall in British manufacturing output in April.

Earlier, Fitch rating agency downgraded 18 Spanish banks less than a week after the agency cut the country's sovereign debt rating, underscoring the potential for lenders' assets to deteriorate further.

Fitch, which already cut Santander and BBVA on Monday, cut the ratings for CaixaBank, Bankia, Banco Popular Espanol and others.

"In particular, Spain is expected to remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013," Fitch said in a statement.

Last week Fitch slashed Spain's rating by three notches to BBB.

Elsewhere, Economic and Monetary Affairs Commissioner Olli Rehn said tightening fiscal integration in the euro zone and surrendering more sovereignty in the name of deeper co-operation between member states may be possible only in the medium term, dampening expectations of a rapid leap forward.

The European Central Bank and some US and European policymakers have called for closer economic integration among the 17 countries that use the euro to underpin the currency, a process that will involve widening the powers of the European Commission in controlling national budgets.

Mr Rehn said it will take time for countries to give up such national autonomy, highlighting the obstacles to advancing rapidly towards such a goal.

"More fiscal integration would likely involve more explicit transfers of sovereignty," Mr Rehn told the European Parliament in Strasbourg. "This may be possible only in the medium term."

EU leaders will discuss tighter co-operation in Brussels at the end of June, aiming to underscore their commitment to the euro and persuade investors of the currency's future.

Reuters