Spain's borrowing costs have soared at its first debt auction since a weekend general election, in a sign that bond market turmoil is far from over.
Debt markets stepped up the pressure despite the conservative Popular Party's crushing win over the ruling Socialists in Sunday's vote and its promises to fix the economy and slash the deficit.
The Treasury raised €2.978 billion in an auction of three- and six-month bills but had to offer yields of more than 5%, far higher than at the previous comparable sale on October 25.
Demand was strong, however, outstripping supply by more than three-to-one and allowing the state to meet its target of between €2 billion and €3 billion, the Bank of Spain said.
For the three-month bills, yields more than doubled to 5.11% from 2.292% in October, with the six-month bills soaring to 5.227% from 3.302%. The yields, or the rate of return earned by investors, were also significantly higher than those traded in the open market.
The European Central Bank has been engaged in a heavy bond-buying programme, keeping yields down on the traded debt of fragile euro zone members including Spain and Italy, market sources say.
Greek PM backs eurobonds idea
Greek Prime Minister Lucas Papademos says eurobonds could help his country and the euro zone overcome the financial crisis battering Europe.
"Eurobonds or similar tools could provide the means to overcome the crisis," Papademos told reporters after talks with Luxembourg's Prime Minister Jean-Claude Juncker, who is also head of the Eurogroup.
The European Commission will present a study of joint euro zone debt issuance, or "stability bonds", tomorrow as a way to help stabilise the debt market and lower sovereign financing costs in the future.
To overcome opposition to the idea of eurobonds from Germany and the European Central Bank, the Commission will also propose much tighter and more intrusive control of national budgets in the 17 countries that use the euro.
Meanwhile, Papademos reiterated that the three parties in his national unity government must provide a written guarantee to Greece's international lenders that they will back austerity measures in order to ensure that a next tranche of aid is paid.
He said he expected the party leaders to do their duty and for the issue to be resolved by the end of this month.
Elsewhere, Greece's finance minister has said the European Central Bank's strong focus on price stability risked tipping the euro zone into deflation as the economy of the 17-member currency area slows sharply.
"Price stability, the dogma on which the ECB's operations are structured, is now leading to the risk of deflation and the situation," Evangelos Venizelos told lawmakers from his Socialist PASOK party in a parliamentary committee.
Mr Venizelos also reiterated that Greece's exit from the euro zone was not an option.
"I believe every Greek realises how dangerous and catastrophic this (leaving) would be as a choice... This is an easy decision for us to make."
ECB can't be last resort lender - Bundesbank head
The head of Germany's central bank has said the European Central Bank should not act as lender of last resort for struggling euro zone countries, as such a move could destroy its independence.
Speaking at a conference in Berlin, Jens Weidmann also said he was confident that both Spain and Italy could manage their current difficulties without recourse to outside aid.
"There are compelling reasons why we should stick to the independence of the central bank, especially in difficult times," Weidmann said, according to the text of a speech provided by his office. The ECB "does not have the mandate - it is even forbidden - to finance the budgets of member states," the central banker added.
