Fears of contagion from political and market turmoil in Greece sent Spanish borrowing costs to 11-year highs, in spite of a deal between the European Union and the International Monetary Fund that reduced the chance of an imminent default in Athens.
Spanish government bond yields, which move inversely to prices, jumped to highs last seen in September 2000, while Greek yields surged to fresh euro-era highs on Thursday.
Investors scrambled into the havens of US and German government bonds with yields on Treasuries and Bunds dropping to seven-month lows.
The threat of a Greek default within weeks receded as international leaders overcame a hurdle to ensure Athens received bail-out loans to repay maturing debt in July.
A failure to repay this debt would trigger a default.
But the loans are conditional on the Greek parliament backing new austerity measures. In Athens, George Papandreou, prime minister, was fighting to persuade his own party, let alone the opposition, of the need to pass the measures.
Olli Rehn, the EU’s top economic official, raised the prospect of a default and emphasised the need for the austerity package to be approved by the end of the month.
Mr Rehn said the IMF had agreed to pay Greece its €12bn aid tranche next month even if eurozone leaders do not agree on a new €120bn Greek bail-out.
The IMF had balked at making its payment without a new rescue package in place, a move that would have triggered a Greek default within weeks.
But the fund softened its position after it became clear that differences between Germany and the European Central Bank over the bail-out terms were intractable. “By doing so, we will avoid the default scenario and pave the way for an agreement on the [bail-out],” Mr Rehn said. A bail-out deal is now expected at a meeting of EU finance ministers on July 11.
Mr Papandreou defended his handling of the country’s debt crisis in an attempt to persuade dissident socialist deputies to back the austerity package. In a live televised speech televised live, the premier admitted his government had made mistakes but also criticised Greece’s EU partners, saying they had “made wrong moves” over the crisis.
Neither the German government nor the IMF would be prepared to pay more money to Greece unless Athens can agree on its new programme, according to senior officials in Berlin.
Spanish 10-year bond yields jumped to 5.73 per cent and two-year Greek yields rose above 30 per cent at one point.
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