Spain was thrown back onto the front line of the euro zone debt crisis today as its long-term borrowing rate shot above 7%, dashing hopes for a respite after the Greek election.
Market fears of the debt crisis spreading from Greece to the euro zone's 4th largest economy, Spain, appeared to advance instead of retreating.
Fears are also mounting for the euro zone's third economy - Italy.
The weekend elections put Greece's conservative New Democracy party in the lead.
It now has enough seats to form a ruling coalition committed to austerity measures set out in the nation's €130 billion EU/IMF bailout.
"The country does not have a minute to lose," said the party's leader Antonis Samaras. And the financial markets did not give much time for a pause.
After a brief rally on the receding prospects of a Greek euro exit, European equities quickly pulled back.
On the government debt market the rate of return investors demanded to hold 10-year Spanish bonds climbed to 7.174% this evening - the highest level since the birth of the euro in 1999 and a level regarded as unsustainable over the long term - from 6.838% on Friday night.
The gap with the yield on German 10-year bonds, the euro zone benchmark, widened to a record 5.56 percentage points. Italy's bonds, too, traded above 6% this evening.
Investors continue to worry about the risk of a full-blown Spanish bailout despite a June 9 euro zone agreement to loan Madrid up to €100 billion to save banks exposed to the collapsed property sector. The exact figure to be requested will be set after an audit carried out by two international consultant groups, Oliver Wyman and Roland Berger, due by June 21 but expected imminently.
Economists in Spain said the Greek elections only clarified doubts about the nation's rescue but did not resolve them. They cautioned against reading too much into the rising Spanish debt risk premium, saying a Spain bond issue due on Thursday would be a better indicator of market sentiment.
The IMF warned on Friday that Spain must implement comprehensive reforms to win back market confidence even after securing the rescue loan for its banks.
Among the hardest to digest are raising VAT now - a step the ruling Popular Party had promised not to take during its election campaign; immediate legislation on future public wage cuts; separating "non-viable banks" from those that need no aid and those that are viable but need support.
It also advising delaying some of the austerity squeeze on the economy, which is in recession and suffering a 24.4% unemployment rate, the highest in the industrialised world.
But Prime Minister Mariano Rajoy, in an informal briefing to Spanish media at the weekend, reportedly said he would not be following the IMF advice on VAT or public wage cuts. In a speech to his party members he vowed, however, to pass reforms to make the economy "more flexible and competitive".
Rajoy, upon his arrival in Mexico for a meeting of leaders of the world's top 20 economies, said "I think what we are going to transmit is a message of confidence in the euro."
Meanwhile, the bad numbers kept rolling in for Spain. The mountain of doubtful loans held by Spain's banks surged to a new 18-year record of 8.72% of total loans compared to 8.37% in March and 8.15% in February, the Bank of Spain said today.
Spain's public debt rose to 72.1% of gross domestic product in the first quarter of 2012 from 63.6%the same time a year earlier, according to latest central bank data. The government expects the public debt to reach 79.8% of GDP by the end of the year, without including the impact of the huge euro zone banking loan.
The ratings agency Moody's Investors Service, which slashed Spain's rating to one notch above junk bond status last week, projected the public debt would hit 90% of GDP this year.
