Spain’s borrowing costs soar following election

SPAIN’S short-term borrowing costs hit a 14-year high yesterday as political uncertainty about a solution to the eurozone’s debt crisis punished another southern European country.

EU paymaster Germany continues to block the two most widely-touted exit routes from a crisis that is shaking the world economy — massive European Central Bank (ECB) intervention to buy government bonds, or joint issuance of euro zone debt.

Influential ECB policymaker Jens Weidmann, head of Germany’s Bundesbank, spelled out his rejection of the former in a speech to employers in Berlin.

“[The ECB] would overstretch its mandate and call into question the legitimacy of its independence by accepting a role of lender of last resort for highly indebted member states,” said Weidmann.

Anyone who believed the crisis could be overcome by giving up stability-oriented principles, and by pushing aside existing legislation, was wrong, he said. “To do that would be like drinking sea water to kill thirst.”

German Chancellor Angela Merkel called for much tougher rules to override national budget sovereignty if eurozone states failed to follow agreed EU rules.

It was “not very appropriate” to discuss eurozone bonds now, since mutual debt guarantees could come only at the end of a European integration process, if at all, she said.

Average yields on Spanish 3 and 6-month treasury bills soared by around 2% in an auction seen as a test of investor sentiment after the conservative People’s Party won an absolute majority in Sunday’s general election.

Prime Minister-elect Mariano Rajoy disappointed investors by refusing to give any clearer indication of his austerity plans or his choice of economy minister until he is sworn in on December 20, leaving the kind of policy vacuum markets abhor.

Credit ratings agency Fitch said Spain’s new government would need to enact additional savings measures to meet its existing fiscal targets and had a window of opportunity to do so with a fresh mandate.

“If it is to improve market expectations of its capacity to grow and reduce debt within the confines of the eurozone, it must positively surprise investors with an ambitious and radical fiscal and structural reform programme,” Fitch said.

The ECB has been sporadically buying Spanish and Italian government bonds to prevent prices spiking to unaffordable levels, but the limited, stop-go purchases have failed to provide durable relief.

“The yields are a reflection of where their paper trades in the secondary market but if it wasn’t for the ECB, there wouldn’t be a Spanish or Italian bond market,” said Gary Jenkins, head of fixed income at Evolution Securities.

New Italian Prime Minister Mario Monti outlined his reform plans in Brussels as Italy’s two-year bond yields rose back above 10-year yields in a sign of market stress, prompting the ECB to buy short and medium-term Italian paper, dealers said.