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Spanish borrowing costs climb

Bond trader in MadridSpanish bond yields dipped after the bank bailout was agreed but have now risen again

Spanish 10-year bond yields rose to dangerous levels earlier ahead of a summit of eurozone finance ministers.

The yield on Spanish 10-year bonds, which are taken as a strong indicator of the interest rate the government would have to pay to borrow money, rose above 7%, while Italian bond yields rose to 6.1%.

Yields above 7% are considered to be unsustainable in the long term.

Details of a bailout of Spain’s banks are expected from eurozone ministers.

They are meeting in Brussels to discuss the terms of that bailout, as well as the creation of a single institution to consolidate all the toxic assets of the country’s banking sector in one place.

But, as BBC Europe correspondent Chris Morris says, by sending its borrowing costs higher, the markets are sending a message to the eurozone that plans to help Spain are not convincing.

The high yields on Spanish and Italian bonds were in contrast to the rates at short-term German and French bond auctions on Monday.

The yield on six-month German bonds fell to a record low of -0.03%, meaning that investors were paying the German government to lend money to them.

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The markets are sending a message to the eurozone that plans to help Spain aren’t convincing.

Ten days after a European summit which tried to send a decisive signal about the eurozone’s determination to help Spain and Italy, the message has become muddled.

The summit agreed in theory that it would be easier in the future for eurozone bailout funds to be used to help struggling banks and struggling national economies.

But there are differences of opinion on the timescale, and several countries are reluctant to move too quickly.

The dangerous roller coaster ride in the eurozone continues.

It was the second time that German bond yields had been negative. The auction was oversubscribed, despite the negative yield.

France sold short-term bonds at negative yields for the first time on Monday.

Investors have been flocking to French and German debt as havens from the problems elsewhere in the eurozone.

Loan conditions

Eurozone officials have been reported as warning that not too many quick decisions should be expected from the finance ministers’ meeting, which is supposed to add detail to the agreements from the eurozone leaders’ summit on 29 June.

The communique from that summit said it expected the finance ministers “to implement these decisions by 9 July”, although many analysts say that now looks optimistic.

Leaders have already agreed to lend Spain’s banks up to 100bn euros ($123bn; £79bn) and independent audits have said that they will need up to 62bn euros.

The finance ministers are likely to confirm the size of the bailout and which conditions will be applied to the loans, both for the banks and the government.

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It has also been reported that on Tuesday, Spain will be given an extra year to bring its budget deficit down to the permitted level.

Among the key agreements from the 29 June summit were moves towards banking union with the European Central Bank (ECB) acting as a supervisor and allowing European bailout funds to buy bonds to try to reduce countries’ borrowing costs.

But since the summit, there have been signs that Finland and the Netherlands would oppose the use of bailout funds in this way.

There is expected to be discussion of the new Greek government’s policies. At the end of a three-day debate, the Greek government, as expected, won a vote of confidence on Sunday.

Another area of discussion for the eurozone finance ministers will be choosing a new leader.

Jean-Claude Juncker has been co-ordinating the Eurogroup of finance ministers since 2005. His term of office ends on 17 July, but it may be extended.

Also on Monday, ECB president Mario Draghi appeared before the European Parliament’s committee on economic and monetary affairs.

“We need to move towards a further sharing of sovereignty in the fiscal, financial and economic domains,” he said.

“The euro is here to stay and the euro area will take the necessary steps to ensure that.”

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