Euro bonds come under new attack

The Irish bail-out has failed to calm market nerves

The cost of borrowing for Spain and Italy has continued to increase as worries over the eurozone debt crisis have continued.

The difference between the yield on German government bonds – considered the safest – and yields on Spanish and Italian debt has reached the highest in the euro’s 12-year history.

Nerves remain frayed following the bail-out of the Irish government.

And Portugal has added to worries by warning of the risks facing its banks

Meanwhile the euro continued its decline against the dollar to touch an 11-week low on Tuesday.

The euro dropped to $1.2969, its lowest since 15 September, before recovering to $1.2979, down 1.1%. And against sterling one euro was worth 84 pence.

The rate of return – or yield – on Spain’s 10-year bonds had jumped as high as 5.7%, a record difference of 3.05 percentage points compared with the benchmark Germany 10-year bond.

Yields on Italian government debt were 2.1 percentage points higher than that on German debt.

Worries remain about the strength of the weaker members of the 16-country eurozone currency bloc with Spain and Portugal – long seen as the most likely candidates to need outside financial help – joined by Italy and Belgium on the less-favoured list.

Portugal’s central bank warned overnight that the country’s banks faced an “intolerable risk” if the government in Lisbon failed to consolidate public finances and urged financial institutions to reinforce their capital in the coming years.

Portugal, which approved an austerity budget for 2011 last week, is struggling to meet its targets for deficit reduction.

The German economy, on the other hand, has been very strong this year, with strong demand for exports and falling unemployment.

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