• Interest rate on 18-month bond nears 4%
• Relief that buyers could at least be found
• Soros warns 'real crisis' requires euro bonds
• UK banks claw back some of Monday's losses
Spain saw its borrowing costs leap to a nine-year high on Tuesday as the eurozone debt crisis continued to dominate the financial markets.
Although Spain found buyers for €661m (£581m) of 18-month bonds, it had to agree to pay a yield, or interest rate, of 3.912%. This is the highest yield on such bonds since 2002, according to Reuters, and a significant rise on the 3.26% agreed at the last sale of 18-month bills.
This 18-month auction was heavily oversubscribed – with Spain receiving offers for 5.5 times as much debt as it sold.
Spain also sold €3.7bn (£3.25bn) of 12-month bonds at a yield of 3.7%, up from 2.695% at the previous auction in June. Its bid-to-cover ratio - the measure of how oversubscribed the auction was - was 2.2.
The auction was the first measure of investor confidence since last week's EU stress tests. There was some relief in the City that the auction had not failed, and that buyers were still prepared to take on Spanish debt despite fears that the country will have to seek a bailout.
The yield on 10-year Spanish debt, seen as the key indicator of market confidence, eased back to 6.2%. Italian 10-year bonds also strengthened, with the yield dropping to 5.7%.
But economists remain concerned that Europe is struggling to get to grips with the ongoing debt crisis, ahead of a crucial emergency meeting scheduled for Thursday. Gary Jenkins of Evolution Securities believes European leaders must announce a 'comprehensive package which will have elements of a fiscal union', if they are to persuade international investors that Italian and Spanish bonds are safe.
'Whatever resolution is put in place for Greece will probably be taken as the template for Ireland, Portugal etc and there is a chance that the EU announces something that gives the market some short-term relief. But the number of cans that now need kicking down the road would challenge the left foot of Lionel Messi,' wrote Jenkins in a research note.
Around €160bn of Italian bonds mature this year, with a further €250bn coming up for repayment in 2012. This far exceeds the current resources of the existing European financial stability mechanism.
Banks shares claw back losses
In London, bank shares staged a small rally following Monday's heavy losses. Barclays topped the FTSE 100 risers, up 4.5% in morning trading, recovering some of its 6% decline as investors balked at last week's European banking stress tests.
UK government debt was also in demand on Tuesday, at an auction of five-year gilts. The yield on the securities fell to 1.78%, down from around 1.95% in June.
The euro rose against the dollar on Tuesday, gaining over half a cent to $1.417 after a survey of German economic sentiment came in above forecast.
But billionaire financier George Soros warned that the single currency was still at risk, and argued that further integration is needed to hold the EU together.
'The euro is a real crisis. It's a crisis of the European Union, not just of the euro,' Soros told the Today programme.
Soros said that Greece's troubles – the country is still shut out of the international money markets and needs a second bailout – have shown the problems of the European Union. He argued that so-called 'euro bonds' need to be created, so that weaker members of the region can still borrow.
'In order to deal with Greece, you have to strengthen the arrangements for the euro. The trouble is that the European establishment is now sticking to the status quo.'
Nouriel Roubini, professor of economics at New York University and chairman of Roubini Global Economics, has argued that banks across the eurozone need to be recapitalised to prevent the contagion spreading further.
'The eurozone's current muddle-through approach is an unstable disequilibrium: kicking the can down the road, and throwing good money after bad, will not work,' Roubini wrote on Project Syndicate. 'Either the eurozone moves toward a different equilibrium – greater economic, fiscal, and political integration, with policies that restore growth and competitiveness, including orderly debt restructurings and a weaker euro – or it will end up with disorderly defaults, banking crises, and eventually a break-up of the monetary union.'
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