Eurozone bond strains rise on angst over weakest members

(PARIS) - Financial storm clouds gathered over the eurozone on Thursday as Irish and Portuguese borrowing costs soared, Spain reported zero growth and the Greek prime minister said his country's public deficit could be worse than expected this year.

The four countries, grappling with the effects of years of overspending, have had to impose harsh austerity measures aimed at restoring stability to their public finances and confidence on financial markets.

But their efforts have failed to convince jittery investors, forcing governments to offer ever higher fixed interest rates, or yields, to attract investors to buy their bonds and fund their debt.

On Thursday the yield, or interest rate, on the Irish 10-year bond jumped to 8.846 percent, its highest level since the creation of the eurozone in 1999, from 8.639 percent on Wednesday.

The yield spread with the benchmark 10-year German Bund came to 6.50 percentage points, reflecting investor fears the Irish parliament might reject a 2011 budget that calls for spending cuts of 6.0 billion euros.

In Portugal, the yield on 10-year paper hit 7.117 percent from 7.086 percent on Wednesday, when it broke through the 7.0 percent threshold for the first time since 1999.

Portuguese Finance Minister Fernando Teixeira dos Santos said on Wednesday that investor jitters "are basically linked to uncertainties regarding the form that a future European mechanism to manage (financial) crises will take."

Spain meanwhile faced fresh complications in its financial recovery drive after the statistics office said the economy registered no growth in the third quarter.

Spanish bonds have also been affected by strains on financial markets where there is concern that austerity needed to control overspending could tip some countries back into recession, cutting tax revenues and adding to their problems in controlling budgets.

The government, alluding to how low growth complicates the overall pictgure, said the zero figure would impede its battle to slash the unemployment rate of more than 20 percent, the highest in the 16-nation euro zone.

"It is not possible to create employment" with zero growth, Employment Minister Valeriano Gomez said.

"Spain still needs to grow by 2.0 percent to create employment," he told Cadena Ser radio.

Greek Prime Minister George Papandreou acknowledged on Thursday that the Greek public deficit this year could exceed 8.1 percent of output, a target the government agreed to meet in exchange for a rescue package from the International Monetary Fund and the European Union.

But Papandreou said the difference would reflect an expected upward revision by the European statistics body Eurostat to the 2009 baseline shortfall, which could come to 15 percent rather than an earlier estimated 13.6 percent.

EU auditors have been trawling through the Greek national accounts to get a clear picture of previously unreliable data to establish where the country was last year, in order to measure the deficit this year

Papandreou stressed that the revised figures, which Eurostat is due to release on Monday, "do not change the fact that we are sticking to the promise we have made to reduce the deficit."

In May, the EU and International Monetary Fund cobbled a 110-billion-euro (140-billion-dollar) rescue package for debt-strapped Athens after markets turned against it, demanding exorbitant returns for buying its government debt.

Faced with paying more in interest than it could ever hope to repay, Greece turned to the EU and IMF for help.

On Tuesday, Greece raised 390 million euros (544 million dollars) in a sale of six-month treasury bills but had to offer steeper terms to attract investors.

The yield offered was 4.82 percent, compared to 4.54 percent for an equivalent treasury bill issue worth 900 million euros a month earlier.