French and Spanish borrowing costs shot up today as the spread between their bonds and those of Germany hit a record high despite political leaders' promises to end the euro zone debt crisis.
French President Nicolas Sarkozy follows the bond spread closely, worried that markets are losing confidence in the ability of all euro zone countries' apart from Germany to manage their public deficits and sovereign debt.
The spread between 10-year French bonds and the equivalent German bund hit 2.006 percentage points. Spain's spread hit 4.895 percentage points, another record for the single currency era.
France now has to pay more than twice as much as Germany to borrow for 10 years, even though both theoretically carry the top AAA credit rating, which Sarkozy's government is fighting desperately to retain.
Markets were also watching France and Spain's latest new issue of shorter term bonds, which saw both countries forced to pay higher interest. France raised €6.976 billion in two and five-year bond sales, and will pay 2.82% on a €3.3 billion issue that is to mature in July 2016, up from 2.31% in a comparable sale in October.
Meanwhile, euro zone neighbour Spain had to pay a rate of 6.975% - very near the 7% level considered unsustainable - to raise €3.563 billion in an auction of 10-year bonds.
No risk of Spain needing bail-out: finance minister
Spain's Finance Minister Elena Salgado said today there was no risk that the country would need to be bailed out to shore up its public finances.
Spain is "absolutely not at risk of a bail-out," Salgado said on Spanish radio, after the government's borrowing costs rose to the highest levels since the introduction of the euro.
"It is true that the markets are nervous but the sustainability of our debt is beyond all doubt," Salgado said.
Spanish government 10-year bonds were trading at 6.75% - the highest since May 1997 - on the secondary market at one point today before falling slightly to 6.5% this evening.
In the last few days all rates or yields on existing euro zone bonds have risen against the euro zone benchmark, the German Bund yield.
France owes €1.7 trillion, only slightly less than Italy, which has been put under IMF surveillance and given a new technocratic government led by respected economist Mario Monti in a bid to reassure the markets.
The French government has embarked on an austerity programme, but the European Commission has warned it does not go far enough and, with growth forecast to slump, Paris could fail to meet deficit reduction targets.
Sarkozy was expected to hold telephone talks with Germany's Chancellor Angela Merkel about the crisis, and markets are nervous about reports of a widening rift between the euro zone's two biggest economies.
France is pushing for the European Central Bank, with its near limitless resources, to take a stronger role in shoring up sovereign debts. The idea is not popular in Berlin, where any suggestion that a central bank start printing money revives memories of pre-war hyperinflation, but there are signs Merkel is becoming increasingly isolated on the issue.
Merkel rejects Kenny's ECB call
A call by Taoiseach Enda Kenny yesterday for the ECB to play a greater role in the euro zone crisis has been rejected by the German Chancellor Angela Merkel.
During his visit to Berlin, Mr Kenny had said that the ECB should now be used to provide the "unlimited firepower" to prevent financial panic from spreading.
But in an address this morning, Dr Merkel stated: "If politicians think the ECB can solve the euro crisis, then they are mistaken. That's why my main point is political action."
Mr Kenny had made his call for ECB intervention because he said that the existing EU bail-out mechanism, the EFSF, had failed to attract investor confidence.
The leader of euro zone finance ministers, Luxembourg's Prime Minister Jean-Claude Juncker, warned yesterday that Germany should not lecture others in the single currency bloc while its own debts remain high.
This year's euro zone debt crisis is the second major shock to the global economy since the 2008 credit crunch, and has spread from peripheral states such as Greece and Portugal to threaten relative giants like Italy.
With even "AAA" powers like France now in the firing line, it has shown up weaknesses in Europe's financial governance, as wildly different economies struggle to agree tactics under a single, conservative central bank.
