Bond investors brought the governments of Spain and Italy to the brink of crisis Friday as the cost of borrowing rose to nearly unsustainable levels.
The interest rate on a 10-year loan to the Spanish government briefly topped 6 percent -- a level that forced Greece into a default earlier this year, despite a massive financial support from international sources -- before settling back to 5.96 percent.
The pick-up in yields is a clear negative headline for Spain, Jo Tomkins, an analyst at 4Cast, a consulting firm, told the New York Times. The country is facing a double-whammy of low growth and tough austerity, and doubts that it will be able to hit already optimistic deficit targets.
The surge in bond yields followed by a few hours a two-notch credit downgrade by Standard & Poor's, which slashed the country's rating to BBB + on worries about the government's exposure to the nation's ailing banks. The current reduced rating is still considered investment grade.
The yield on Spain's two-year notes surged to the highest level in 18 years, Bloomberg News said.
Meanwhile, Spanish unemployment climbed to 24.4 percent of the workforce, the government said.
Italy's cost of borrowing was close behind its western neighbor: the yield on a 10-year note rose Friday to 5.84 percent from 5.24 percent.
These ... results certainly came at a price which, in turn, leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable, Richard McGuire, senior fixed income strategist at Rabobank, told the Wall Street Journal.