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Spain rattles markets amid bailout fears Spain rattles markets amid bailout fears
(40 minutes later)
  
Markets have fallen on fears Spain's indebted regional governments will push the country into seeking a bailout. Markets have fallen on fears Spain's indebted regional governments will push the country towards full bailout.
On Friday, Valencia, one of the country's 17 regions, asked the central government for a financial lifeline, and on Sunday, the Murcia region said it was considering following suit.On Friday, Valencia, one of the country's 17 regions, asked the central government for a financial lifeline, and on Sunday, the Murcia region said it was considering following suit.
Shares in Europe fell, with Spain's main share index down 5%. The euro hit a new two-year low against the dollar.Shares in Europe fell, with Spain's main share index down 5%. The euro hit a new two-year low against the dollar.
The yield on Spain's 10-year bonds reached a new euro-era high of 7.56%. Spain's economy minister denied the country needed more help.
Luis de Guindos said: "We have made important economic reforms and we just reached an agreement with our regional partners over the recapitalisation of the banks, and from there we have done all what we could to establish the bases of a return to a healthy growth for Spain's economy."
Markets remained unsettled. The yield on Spain's 10-year bonds reached a new euro-era high of 7.56% before falling back to 7.43% in early afternoon trading.
The bond yield indicates the interest rate the government would have to pay to borrow new money, and acts as a measure of investor confidence in Spain's creditworthiness. On Friday, the yield had been 7.28%.The bond yield indicates the interest rate the government would have to pay to borrow new money, and acts as a measure of investor confidence in Spain's creditworthiness. On Friday, the yield had been 7.28%.
Meanwhile bond yields in country's deemed more creditworthy have fallen. Germany's 10-year borrowing costs have fallen to 1.13%, leaving a record difference between the yield on German and Spanish bonds.Meanwhile bond yields in country's deemed more creditworthy have fallen. Germany's 10-year borrowing costs have fallen to 1.13%, leaving a record difference between the yield on German and Spanish bonds.
Euro lowsEuro lows
A yield, or interest rate, of 7.5% on 10-year bonds takes Spain even further into the danger zone.
Higher borrowing costs can make the difference between a debt situation that is a problem and one this is ultimately unsustainable.
But the impact on the interest bill is slow. It's like turning an oil tanker.
When governments borrow they generally do by selling bonds - which are a promise to repay - and the interest rate is fixed for the lifetime of each batch of bonds. Each time Spain goes to the market for new money, the interest rate it pays then feeds into its total borrowing costs.
The general trend is upwards and that means the tanker is gradually turning towards the rocks. The eurozone has to decide whether to grab the wheel, giving a new bailout to keep those borrowing costs from rising further.
Spain has already asked for and been granted a 100bn-euros bailout for its banks, so far avoiding asking for the same sort of national bailout that was needed by Greece, the Republic of Ireland and Portugal.Spain has already asked for and been granted a 100bn-euros bailout for its banks, so far avoiding asking for the same sort of national bailout that was needed by Greece, the Republic of Ireland and Portugal.
However, on Friday the Valencia region said it would be the first region to seek financial help from an 18bn-euro fund set up to help the country's regions.However, on Friday the Valencia region said it would be the first region to seek financial help from an 18bn-euro fund set up to help the country's regions.
On Sunday, Murcia's government said: "Regarding the liquidity fund provided by the state, the regional government has repeatedly stated that it is studying whether to apply for it."On Sunday, Murcia's government said: "Regarding the liquidity fund provided by the state, the regional government has repeatedly stated that it is studying whether to apply for it."
There is speculation that other regions are also considering seeking assistance.There is speculation that other regions are also considering seeking assistance.
There was more bad news for Spain on Monday when the Bank of Spain said the country's economy contracted by 0.4% in the three months to the end of June, having shrunk by 0.3% in the previous quarter.There was more bad news for Spain on Monday when the Bank of Spain said the country's economy contracted by 0.4% in the three months to the end of June, having shrunk by 0.3% in the previous quarter.
European stock markets fell on Monday morning, with Spain's main Ibex share index down more than 5%.European stock markets fell on Monday morning, with Spain's main Ibex share index down more than 5%.
Italy, which is also struggling with high debts, saw its main share index fall 4.4% with banks the worst hit. UniCredit and Intesa Sanpaolo were among six Italian banks suspended from trading after their share prices fell sharply.Italy, which is also struggling with high debts, saw its main share index fall 4.4% with banks the worst hit. UniCredit and Intesa Sanpaolo were among six Italian banks suspended from trading after their share prices fell sharply.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
On the currency markets, with euro fell to a two-year low against the US dollar, at $1.2082, while in Asian trade the euro had fallen to an 11-year low against the Japanese yen, 94.37 yen, its lowest level since November 2000.On the currency markets, with euro fell to a two-year low against the US dollar, at $1.2082, while in Asian trade the euro had fallen to an 11-year low against the Japanese yen, 94.37 yen, its lowest level since November 2000.
The price of oil has also fallen by 2%, a sign that markets think there will be waning demand for oil as a result of worsening economic prospects.The price of oil has also fallen by 2%, a sign that markets think there will be waning demand for oil as a result of worsening economic prospects.
"The fear now is that, given its debt woes, Spain may eventually need a bailout from the International Monetary Fund or the eurozone's rescue fund," Justin Harper of IG Markets told the BBC."The fear now is that, given its debt woes, Spain may eventually need a bailout from the International Monetary Fund or the eurozone's rescue fund," Justin Harper of IG Markets told the BBC.
"That is driving investors away from the euro to other relatively safer-haven assets.""That is driving investors away from the euro to other relatively safer-haven assets."
Greece review Greece review
Focus is also returning to Greece's woes. On Tuesday, officials from the so-called "troika" - the International Monetary Fund, the European Commission and the European Central Bank - will arrive in Greece to assess the progress made on reforms that were agreed as part of the country's latest bailout.Focus is also returning to Greece's woes. On Tuesday, officials from the so-called "troika" - the International Monetary Fund, the European Commission and the European Central Bank - will arrive in Greece to assess the progress made on reforms that were agreed as part of the country's latest bailout.
Reports over the weekend suggested that the IMF would refuse calls for further aid, if, as expected, the country fails to meet targets for cutting spending and raising taxes.Reports over the weekend suggested that the IMF would refuse calls for further aid, if, as expected, the country fails to meet targets for cutting spending and raising taxes.
There are also questions over how the country will make a 3.2bn-euro bond payment due in August.There are also questions over how the country will make a 3.2bn-euro bond payment due in August.
A European Commission spokesman said on Monday that it was unlikely that the next tranche of eurozone aid for Greece would be paid before September.A European Commission spokesman said on Monday that it was unlikely that the next tranche of eurozone aid for Greece would be paid before September.
"The decision on the next disbursement will only be taken once the ongoing review is completed," the spokesman said."The decision on the next disbursement will only be taken once the ongoing review is completed," the spokesman said.
"Over the last few months, significant delays in programme implementation have occurred due to the double parliamentary elections in the spring."Over the last few months, significant delays in programme implementation have occurred due to the double parliamentary elections in the spring.
"The Commission is confident that the decision on the next disbursement will be taken in the near future, although it is unlikely to happen before September," he said."The Commission is confident that the decision on the next disbursement will be taken in the near future, although it is unlikely to happen before September," he said.