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International News Title: Spanish Woes Continue To Deepen; Turmoil Spreads To Italy The euro-zone debt crisis deepened Tuesday as a sharp rise in Spanish government bond yields to their highest levels since the inception of the euro fanned speculation that the country might need a bailout of its own, just days after Spain sought a support package for its beleaguered banking system. The market turmoil also spread to Italy, the euro-zone's third largest economy, where bond yields leapt higher ahead of a crucial bond sale later this week and weekend elections in Greece that could decide the country's fate in the common-currency region. The deepening gloom surrounding Spain's credit-worthiness could have grave implications. A sovereign bailout for Spain will severely test the firepower of the euro area's rescue funds, hardly leaving any money in the pot if Italy were to be shut out of bond markets. "It is quite likely that Spain needs a full bailout in the near future although policymakers will try all possible options to avoid this outcome, including a revival of bond purchases by the ECB as well as another three-year liquidity operation," said Pavan Wadhwa, global head of interest rate strategy at JPMorgan. "The concern is that the more peripheral debt the official sector holds, worries over subordination mean that the private sector will be less willing to lend to these countries," he said. Investor appetite for Spanish debt has waned in recent months with foreign investors remaining firmly on the sidelines as the sovereign's borrowing costs move ever closer to levels seen as unsustainable by the market. Fears that private bondholders will fall behind official creditors in the pecking order has served to undermine sentiment further and snuffed out any optimism following the bank rescue package. "The bottom line is that the (Spanish) bank bailout is a sovereign liability and will increase government debt by around 10% of GDP," analysts at Citigroup said in a note to customers. "Furthermore, if the funds come from the ESM [European Stability Mechanism] this will likely subordinate existing bond holders." Spain has sought a bailout package of up to 100 billion euros ($125 billion) to shore up its ailing banking sector. Unlike other euro-zone rescue deals, Spain is still expected to come to the government bond market for its funding requirements. "The feeling in the market is that the (Spanish) banking package is too little, too late," noted one trader before adding "I'd say there is a 50% chance that Spain needs a bailout of its own and Italy's not far behind either." At 1520 GMT, the yield on Spain's 10-year benchmark was 21 basis points higher at 6.68%, having soared to a euro-era high of 6.80% earlier, according to data from Tradeweb. The five-year yield climbed 28 basis points to 5.97%. Yields on Italian government bond paper also moved sharply higher as dealers looked for the next shoe to drop. The yield on the 10-year Italian benchmark rose 16 basis points to 6.13%, having climbed to 6.26% earlier, the highest level this year. Italy is scheduled to auction up to EUR4.5 billion of three and seven-year bonds Thursday in what is being seen as yet another litmus test for the peripheral bond market. Austrian Finance Minister Maria Fekter fanned contagion fears after saying in a television interview Monday that Italy's high borrowing costs could prompt a financial rescue for the peninsula. Although she backtracked Tuesday, saying there was no sign Italy would request a bailout, her comments drew criticism from Italian Prime Minister Mario Monti who said that it's inappropriate for other countries to comment on Italy's economic situation. Italy faces a towering EUR1.9 trillion public debt, which is expected to grow further as the austerity measures introduced by Mr. Monti's government dampen consumer consumption and cripple growth. The government is now seeking to promote measures to stimulate the economy, but it is finding it difficult to find the public funds to finance them. Euro-zone worries extended to Tuesday's Dutch government bond auction with the Dutch State Treasury Agency selling only EUR1.65 billion of the January 2033 DSL, at the low end of the scheduled EUR1.5 billion to EUR2.5 billion target range. Concerns that Spain's problems will extend beyond its sickly banking sector, and that Italy may be the next euro-zone nation in trouble, also pushed the cost of insuring Spanish and Italian debt against default higher Tuesday. The cost of insuring Spanish debt against default crept to another record high. At around 1525 GMT, five-year credit default swaps on Spain were 14 basis points wider at 609 basis points, a new wide level, according to data-provider Markit. That means it now costs over $600,000 a year to insure $10 million of Spanish debt. The cost of insuring Italian debt against default was 14 basis points wider at 564 basis points.
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