Spain's Borrowing Costs Double

The Spanish government saw the yield on its 3 month bills more than double in its first debt auction since the People's Party defeated the outgoing Socialist Party in Sunday's election. The Spanish Treasury successfully raised nearly 3 billion euros ($4 billion) during the auction but the borrowing came at a steep price. The average yield of 2 billion euros of 3-month bills sold at the auction had an average yield of 5.11 percent, more than double the 2.292 percent yield from the last sale of 3-month bills on October 25. Spain also saw yields on its 6-month bills climb higher as it sold nearly 1 billion euros of 6-month bills with an average yield of 5.227 percent, up from 3.302 during the previous auction. The dramatic rise in yields is made all the more alarming by the fact that the European Central Bank (ECB) has been buying Spanish and Italian debt in an attempt to keep borrowing costs. Without the European Central Bank's efforts, the yield on Spanish debt could be even higher. With borrowing costs rising so sharply just after the election, it's clear that the markets don't see the shift in power as a solution to the problems facing the Spanish government and economy. The previous government already pushed through austerity measures aimed at raising taxes while reducing spending. However, similar austerity measures have been introduced in other troubled eurozone economies like Greece and Italy and have done little to improve the countries' economies. In fact, austerity measures can lead to the unintended consequence of pushing an economy into recession, which in turn reduces government income and can lead to further rounds of cost cutting and tax raises. This austerity measure death spiral has been playing out in Greece with no end in sight. Surging borrowing costs in Spain could be yet another sign that the eurozone is not sustainable in its current form. Investors who feel that the euro is doomed as a currency might want to buy an ETF like the ProShares UltraShort Euro EUO or the Market Vectors Double Short Euro DRR. While the chance of a default within the euro is increasing, there's also the possibility that troubled countries like Greece and Spain could drop the euro as their currency and try to export their way back to growth once they have currencies that reflect their countries' true financial strength. Investors who feel that the Germany and France will be successful in their attempts to hold the eurozone together might want to buy the iShares MSCI Europe Financials EUFN or the CurrencyShares Euro Trust FXE ETFs. If countries like Spain, Italy and Greece manage to get through the next year or two, European financial stocks and the euro currency should climb higher.