Spain is on the verge of becoming the biggest victim of the euro crisis so far

Europe plunged deeper into crisis last night as Spain lurched closer to needing a full-blown bailout to save it from collapse.

The government in Madrid was forced to pay prohibitively high interest rates to borrow money on another bruising day for the single currency bloc.

It raised fears that Spain is on the verge of becoming the biggest victim of the euro crisis so far – following the bailouts of Greece, Ireland and Portugal.

A coal miner sets fire to a barricade made of tires during a protest against government cuts in Villafranca del Bierzo, Leon, North-eastern Spain

The country – the fourth biggest economy in the eurozone – is back in recession and unemployment is at 25 per cent with half of young workers unable to find a job.

And the problems on the stock markets were matched on the streets.
Striking Spanish coal miners armed with homemade rockets, slingshots and rocks clashed with police firing rubber bullets yesterday.

 They drove officers out of the town of Cirena in northern Spain in protest at government mining subsidy cuts that could devastate their industry.

Analysts warned that the situation was ‘critical’ for both Madrid and the eurozone despite the £80 billion lifeline thrown to the Spanish banking system last week.

Nicolas Spiro, a government debt expert at Spiro Sovereign Strategy, said: ‘We are in a critical situation now. This is the Rubicon that should have never been crossed. 

'It should have never come to this. We are dealing with a broken government bond market in Spain and quite possibly in Italy. This is exactly where you did not want the cancer to spread.’

Striking Spanish miners fire homemade rockets towards Spanish Civil Guards in Cinera, near Oviedo, northern Spain, during a mass strike against subsidy cuts that they claim threaten tens of thousands of jobs

Spain had to pay an interest rate of 5.07 per cent to sell 12-month debt yesterday – up from 2.99 per cent a month ago and the highest level since the euro was launched in 1999.

The crucial 10-year bond yield was also above 7 per cent – a psychologically important level which proved to be the point of no return for Greece, Ireland and Portugal.

Marc Otswald, an analyst at City firm Monument Securities, said Spanish borrowing costs could lead to a full-blown bailout worth around £250 billion.

‘It is becoming very difficult to see how it can manage without that beyond the end of September unless yields fall dramatically,’ he said.

Ishaq Siddiqi, a market strategist at trading firm ETX Capital, said: ‘The sustained high yields on Spanish bonds remain a considerable concern for markets. 

If the Spanish government fails to address the country’s economic crisis, like Greece, sky high borrowing rates could eventually force Spain into a full sovereign bailout. 

A Spanish bailout would mark a disastrous escalation of the euro crisis, threatening Italy and core eurozone nations such as France and even powerhouse Germany.’