Tags: Euro | Contagion | Fears | Spain

CNBC: Euro Contagion Fears Return, With Spain Leading Way

By    |   Friday, 23 March 2012 01:20 PM

If you think the eurozone's contagion risk is over, you're likely to be disappointed. Rising Spanish bond yields indicate that Spain is suffering from contagion and probably won't get better any time soon, according to CNBC.com

Spanish 10-year bond yields rose to 5.49 percent on Thursday and hovered around 5.47 percent Friday morning, higher than Italian bond yields that were around 5.07 percent.

"It's the contagion risk," Jeffrey Alldis, a trader at ACT Currency Partners in Zurich told CNBC.com. "We're seeing the expectation of volatility increasing which also tells us that uncertainty is rising."

Spain, suffering from a popped real-estate bubble and unemployment of more than 20 percent, is in even worse fiscal shape than Greece, some analysts say.

Spain is struggling to reduce its budget deficit through austerity measures and is
arguing with eurozone bureaucrats over how far to take the measures.

The new Spanish prime minister set a budget deficit target of 5.8 percent eurozone finance ministers said the target will be 5.3 percent, reported CNBC.com.

Many observers thought the contagion would be controlled after the European Central Bank lent money to banks, at record-low 1 percent interest rates, which banks could in turn lend to troubled eurozone countries.

But the ECB's effort only delayed a "looming disaster in the eurozone banking sector," wrote Capital Economics analysts in a market note, according to CNBC.com.

"But it would be wrong to think that they have solved the region's deeper fiscal and economic problems, or secured the future of the single currency itself," they added. "The ECB has administered an effective, but temporary, anesthetic. It is up to the region’s governments to deliver the cure."

Spanish banks have 400 billion euros ($530.53 billion) in construction and real estate loans they made in boom times, according to The Wall Street Journal. Bad loans increased by 7.91 percent in January, the highest since November 1994.

"Spain has now fully taken Italy's place at the back of the euro-zone class," the Journal states. "Madrid has raised its deficit target and failed to convince markets it has fixed the banking system."

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