The European Central Bank may intervene to pull down Madrid's borrowing costs as prime minister Mariano Rajoy warned that debt had created a "vicious circle that strangles Spain".
Benoit Coeure, an executive director of the ECB, said the bank could restart its sovereign bond buying programme in a move likely to antagonize Germany but relieve a spiralling political, economic and social crisis in Spain.
Mr Coeure said that market fears over Spain were "not justified" but he added: "Will the ECB intervene? We have an instrument, the securities markets programme [SMP] which hasn't been used recently but it still exists."
Bond traders were soothed by the comments. The yield on Spain's benchmark 10-year bonds was pulled back from 6pc on Tuesday to 5.88pc, while the yield on Italy's 10-year debt also dropped marginally, to 5.54pc.
Mr Rajoy delivered a strongly-worded speech to parliament insisting that it was "as clear as day" that Spain would not need a Greek-style bail-out.
But in recognition that the country is losing market confidence, he appealed to other European leaders to be "careful with their comments" and remember that "what is good for Spain is good for the eurozone".
Mr Rajoy said that Spain's 2012 deficit target of 5.3pc of GDP was "unconditional" and that the country should not listen to the "noise" or get distracted from its mission.
But Spanish economists warned that the austerity measures were crushing the economy and could spark civil unrest. In opinion pieces in Spanish papers including El Mundo and El Confidencial, economists said the German-led austerity plan was not tackling the root of the crisis nor taking into account the resolve of Spanish trade unions.
On Wednesday, Spain's interior minister introduced new measures to prevent plots using "urban guerrilla" warfare methods to incite protests.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) confirmed Spain's unemployment rate as the highest in the developed world with 4.5m jobless.
The latest report said that unemployment in the eurozone as a whole rose for the eighth month in a row to 10.8pc in February, up from 10.7pc in January.
Spain's statistics office said the nation's industrial production fell 5.1pc on an annual basis in February, against forecasts of a 5pc fall. The energy sector was the only area to record an increase, up 7.7pc on an annual basis.
European stock markets recovered from their sharp fall on Tuesday. Spain's Ibex rose 1.93pc, in Germany the Dax rose 0.85pc, the French CAC was up 0.62pc. In London the FTSE 100 managed a 0.7pc gain.
Italian banks were among the strongest performers as analysts said they were well capitalised compared with Spanish banks. Banco Popolare is up by 6.64pc, while Unicredit has ticked up 5.8pc and Intesa Sanpaolo is up by 5.45pc.
However, Italy was forced to pay a higher cost to shift short-term debt at a bond auction. Rome sold €8bn of one year bills at average interest rates of 2.84pc - more than double the 1.405pc seen at the last auction on March 13. It also sold €3bn of three-month bills at average yields of 1.249pc - compared with 0.492pc at the last auction.
Germany auctioned 10-year debt at record lows of 1.77pc on average.
But demand was surprisingly weak and the Bundesbank had to step in and absorb €1.13bn (£93m) of the €5bn of bonds on offer because there were not enough bidders. Analysts said investors were being put off by the low returns.
The yield on UK gilts dropped marginally to 2.06pc. David Cameron claimed Britain was at an advantage because of its deficit reduction plan.
Speaking in Jakarta on his Asian tour, the prime minister said: "If you look around Europe you can see countries that don't have robust plans getting profoundly punished with high interest rates, whereas we have got some of the lowest interest rates we have had for decades."
telegraph.co.uk
Benoit Coeure, an executive director of the ECB, said the bank could restart its sovereign bond buying programme in a move likely to antagonize Germany but relieve a spiralling political, economic and social crisis in Spain.
Mr Coeure said that market fears over Spain were "not justified" but he added: "Will the ECB intervene? We have an instrument, the securities markets programme [SMP] which hasn't been used recently but it still exists."
Bond traders were soothed by the comments. The yield on Spain's benchmark 10-year bonds was pulled back from 6pc on Tuesday to 5.88pc, while the yield on Italy's 10-year debt also dropped marginally, to 5.54pc.
Mr Rajoy delivered a strongly-worded speech to parliament insisting that it was "as clear as day" that Spain would not need a Greek-style bail-out.
But in recognition that the country is losing market confidence, he appealed to other European leaders to be "careful with their comments" and remember that "what is good for Spain is good for the eurozone".
Mr Rajoy said that Spain's 2012 deficit target of 5.3pc of GDP was "unconditional" and that the country should not listen to the "noise" or get distracted from its mission.
But Spanish economists warned that the austerity measures were crushing the economy and could spark civil unrest. In opinion pieces in Spanish papers including El Mundo and El Confidencial, economists said the German-led austerity plan was not tackling the root of the crisis nor taking into account the resolve of Spanish trade unions.
On Wednesday, Spain's interior minister introduced new measures to prevent plots using "urban guerrilla" warfare methods to incite protests.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) confirmed Spain's unemployment rate as the highest in the developed world with 4.5m jobless.
The latest report said that unemployment in the eurozone as a whole rose for the eighth month in a row to 10.8pc in February, up from 10.7pc in January.
Spain's statistics office said the nation's industrial production fell 5.1pc on an annual basis in February, against forecasts of a 5pc fall. The energy sector was the only area to record an increase, up 7.7pc on an annual basis.
European stock markets recovered from their sharp fall on Tuesday. Spain's Ibex rose 1.93pc, in Germany the Dax rose 0.85pc, the French CAC was up 0.62pc. In London the FTSE 100 managed a 0.7pc gain.
Italian banks were among the strongest performers as analysts said they were well capitalised compared with Spanish banks. Banco Popolare is up by 6.64pc, while Unicredit has ticked up 5.8pc and Intesa Sanpaolo is up by 5.45pc.
However, Italy was forced to pay a higher cost to shift short-term debt at a bond auction. Rome sold €8bn of one year bills at average interest rates of 2.84pc - more than double the 1.405pc seen at the last auction on March 13. It also sold €3bn of three-month bills at average yields of 1.249pc - compared with 0.492pc at the last auction.
Germany auctioned 10-year debt at record lows of 1.77pc on average.
But demand was surprisingly weak and the Bundesbank had to step in and absorb €1.13bn (£93m) of the €5bn of bonds on offer because there were not enough bidders. Analysts said investors were being put off by the low returns.
The yield on UK gilts dropped marginally to 2.06pc. David Cameron claimed Britain was at an advantage because of its deficit reduction plan.
Speaking in Jakarta on his Asian tour, the prime minister said: "If you look around Europe you can see countries that don't have robust plans getting profoundly punished with high interest rates, whereas we have got some of the lowest interest rates we have had for decades."
telegraph.co.uk
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