The European debt crisis entered a new phase overnight, with Spain and Italy, the 8th and 12th biggest economies in the world respectively, showing weak signs.
Investors began to worry overnight when a Spanish government bond auction created only weak demand. Most commentators say interest rates above 6% would be difficult for the Spanish government to afford, given the state of its finances.
After the bond auction, Spanish and Italian bond prices fell, pushing yields on 10-year Spanish government debt up to 5.66%. Italian 10-year bond yields rose to 5.34%. Long-term bond Spanish yields are now more than 40 basis points higher than they were when the European Central Bank launched its first long-term refinancing operation last December.
Spain and Italy comprise more than 21% of European economic output, according to International Monetary Fund figures. Greece comprises only 1.9% of European output or only 0.49% of world GDP.
Yesterday, the head of the IMF, Christine Lagarde called on the world’s developed nations to “increase firepower” to better confront global financial strains.
More about the contrasting Greek and Spanish debt problems.