LONDON -- Europe's long-running debt crisis flared sharply Monday as Spain's borrowing rates jumped to another record high and worries grew over Greece's ability to keep on qualifying for the emergency loans it desperately needs to stay afloat.
Investors skeptical of Madrid's creditworthiness pushed interest rates on Spanish bonds to almost 7.5%, far above the 7% level regarded as the upper limit of what the government can tolerate paying in the long term.
It was the highest yield on record since the common euro currency, which Spain uses, went into circulation in 2002. Although the figure dropped slightly by Monday's end, concern that the Spanish government might eventually be forced to seek an international rescue swept across the continent, sparking heavy losses in the stock markets.
The rise in borrowing rates confounded officials and economists who had thought that a recently finalized deal to bail out ailing Spanish banks, worth up to $121 billion, would assuage investor fears. A new austerity package of tax hikes and spending cuts unveiled last week was also expected to boost confidence in Spain.
Instead, the markets have exhibited serious doubt that Spain's problems -- a tanking financial sector, a shrinking economy, Europe's highest unemployment rate -- are being adequately addressed. Even Madrid's own official forecast doesn't envisage the economy growing again until 2014.
On Monday, Spanish Economy Minister Luis de Guindos insisted that his country would not become the latest, and by far the economically largest, member of the 17-nation Eurozone to require a full-fledged government bailout. But many analysts and investors discount such protestations, because officials in Greece, Ireland and Portugal all said the same before bowing to the inevitable and seeking emergency loans.
De Guindos accused the markets of overreacting.
"There are situations of irrationality in the short-term behavior of the markets, extreme nervousness, which can't be resolved by governments and must be sorted out from other angles," he told reporters in Madrid.
"Spain right now is the breakwater in the current uncertainty surrounding the euro. But this goes beyond Spain," De Guindos added.
He was right on that score: Borrowing rates for Italy, whose economy is even larger than Spain's, have also edged up in recent days. Italian Prime Minister Mario Monti also has had to dispel speculation over a possible rescue for Rome. Europe's bailout funds would probably be overwhelmed if both Spain and Italy needed propping up, a dire scenario that some analysts say could be fast approaching.
The first Eurozone nation to seek a bailout, Greece, is still hanging by a thread. On Tuesday, international monitors are scheduled to arrive in Athens to examine the government's progress in reducing spending and enacting the economic reforms that are the conditions of the country's two massive bailout packages.
Concern is growing that the recent political turmoil in Greece, which held two national elections in the space of six weeks, has thrown its reform program far off track. If inspectors determine that Athens has failed to meet its commitments, the flow of emergency loans could be cut off, putting Greece at risk of bankruptcy.
The effects of a chaotic default are unknown. Though some analysts say it could wreak havoc on the global economy, others argue that the world has had time to prepare for such an eventuality and minimize the fallout.
Impatience with Greece is growing stronger in Germany, Europe's paymaster, where more and more politicians are speaking out against the idea of cutting Athens any more slack. Over the weekend, Germany's vice chancellor suggested that ejecting Greece from the Eurozone, once considered a dangerous idea, might be the best course of action in the end.
"A Greek exit from the Eurozone has long since lost its horror,” Philipp Roesler told German television Sunday.
-- Henry Chu
Photo: Spanish Economy Minister Luis de Guindos gestures during a parliamentary hearing in Madrid on Monday. The portrait at rear is of Miguel Herrero y Rodríguez de Miñón, one of the seven fathers of the Spanish Constitution. Credit: Andres Kudacki / Associated Press