Spain and France borrowing costs rise as debt fears spread

WHAT'S HAPPENED?
Spain staged a bond auction today, which allowed the government to borrow €3.6bn and pay it back over ten years. But the interest they paid on it was an excruciating 6.975 per cent – close to the seven per cent rate over which government debt is considered unsustainable. France is also being forced to pay higher rates on its bonds.

WHAT DOES IT MEAN?
Seven per cent is the rate above which other eurozone countries have been forced to seek bailouts - and Spain has been consistently talked of as a likely casualty of the eurozone debt crisis.

"There's no doubt it was a bad auction," Padhraic Garvey, head of developed-market debt strategy at ING Groep NV, told Bloomberg. "This week has been the worst week of the crisis so far, given where yields are."

Investors fear the problems in Italy, where a government of technocrats has been installed to push through an austerity budget, are spreading to other eurozone countries.

Bond yields are soaring despite action by the European Central Bank, which has been buying the debt of problem nations in an effort to keep interest rates down.

WHAT NEXT?
All eyes are now on France, the eurozone's second largest economy, where bond yields are also climbing. The "spread" between ten-year French and German bonds - the difference the two countries pay in interest - has breached two per cent.

France's problem is it owes nearly as much as Italy - €1.7 trillion - and growth is expected to fall.

AFP reports that President Nicolas Sarkozy wants the ECB to take a stronger role in shoring up sovereign debts. Germany considers such an approach, which could include printing money, to be beyond the pale

Simon Tilford, chief economist at the Centre for European Reform, tells the Financial Times that as countries such as France and the Netherlands find their borrowing costs rise, they are putting pressure on Germany to relent.

"A Germany in a minority of one and subject to increasingly vocal criticism may yet bend, opening the way for the needed ECB shock and awe," he says. ·