Spain's sick economy sees debt costs jump

Spain must be ready for further tax rises to rein in its budget, its central bank governor said on Tuesday, after its debt costs leapt on sliding confidence in the euro zone's fourth biggest economy. Two senior European figures joined a chorus of official voices ruling out a bailout for Spain, which would mark a critical new phase in the euro zone debt crisis, saying the country was delivering on economic reforms.
But Spanish central bank governor Miguel Angel Fernandez Ordonez, weighing in on the centre-right government's deficit reduction plan for the first time since it was unveiled last month, said problems raising taxes and outside factors like growth and inflation could put it at risk.
"The scale of adjustment required in our country is so great that we need to make use of all the instruments available, including taxes," Ordonez said, suggesting raising indirect taxes would be the preferable step. Short-term borrowing costs almost doubled from a month earlier at a sale of more than 3 billion euros ($3.92 billion) of short-term government debt on Tuesday, a bad sign for an auction of 2- and 10-year bonds on Thursday.
Good demand at Tuesday's sale, however, helped nudge 10-year yields back below the six percent threshold they reached on Monday on concern over the banking system, deficit and recession - a point below levels considered unsustainable. In another positive sign, the International Monetary Fund saw Spain growing 0.1 percent in 2013 after forecasting in January a 0.3 percent contraction for next year.
However, the IMF also warned it did not see Spain meeting its deficit goals this year or next and, in forecasts compiled before the new government unveiled its 2012 budget, didn't see Spain meeting the 3 percent of GDP goal until at least 2018. Spain's government has acknowledged it is in recession this year and is fighting to convince sceptical markets it can reduce one of Europe's highest budget deficits amid huge unemployment.
The depth of the crisis fuelled outrage in Spain on Tuesday over revelations its popular king had gone on an elephant hunt in Africa. Some commentators called for King Juan Carlos I, 74, to apologise or even abdicate in favour of his son Felipe. Speaking to parliament's budget committee, Ordonez said the government's austerity measures were essential to restore growth and regain confidence among investors who say debt costs will rise unless the European Central Bank resumes bond purchases after a two-month break, which it has shown no sign of doing.
Spain's 12-month T-bill yielded 2.623 percent in Tuesday's sale, and the 18-month bill yielded 3.110 percent. Both represented a sharp rise in borrowing costs compared with last month's auctions, when the 12-month bill yielded 1.418 percent and the 18-month bill yielded 1.711.