Markets are becoming more uncertain that Spain will be unable to meet its debt obligations. Bond auctions had little demand for two days in a row beginning Friday, July 20. This set markets on a sharp downturn across Europe.
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Yields reached as high as 7.53%. The agreement offered Spain by Eurozone finance ministers is having little effect because it stipulates that Spain has to bring itself back in alignment with Eurozone debt level mandates and will have to pay back the loan.
Economic estimates were lowered drastically for the next several years by the country’s budget minister. Gross domestic product estimates are now for a contraction of approximately .5% instead of previously expected growth of .2%.
Spain is attempting to reduce its budget deficit
from 8.9% this year to 2.8% by 2014. This will require cuts of at least 12% in government spending, including cuts for funding the country’s social security program.
As a result of the poor demand, both Spain and Italy—which is the next country on investors’ watch list—have taken steps to prohibit short selling of both countries’ bonds. Adding to the malaise were comments by Germany’s economy minister that added increased doubt
that Greece would be able to meet the terms of its bailout package.