Spanish woes unnerve world markets

Spain is affecting world financial markets as its debt funding costs approach levels seen before the Greek bailout.

The interest rate on Spain’s 10-year government bonds hit 6.1% yesterday – the highest level since December and close to the 7% which caused bailouts of Greece and Ireland.

“We’re back in full crisis mode. It is looking more and more likely that Spain is going to have some form of a bailout.” Lyn Graham-Taylor, a Rabobank strategist, told the Australian Financial Review.

Spanish Prime Minister Mariano Rajoy said Spain must slash its budget deficit to access financing.

“The fundamental objective at the moment is to reduce the deficit,” Rajoy told a conference in Madrid. “If we don’t achieve this, the rest won’t matter: we won’t be able to fund our debt, we won’t be able to meet our commitments.”

Spanish government forecasts its economy will shrink 1.7% this year as it implements the deepest budget cuts in more than three decades.

Rajoy’s administration has passed new laws giving it the right to intervene in its regional governments.

Some regional government debt has already been downgraded to junk.

The Spanish property bubble burst during the GFC, causing much of the damage to the economy and leaving the country with an unemployment rate of more than 23%.