“We’re in a situation of total emergency, the worst crisis we have ever lived through" said ex-premier Felipe Gonzalez, the country’s elder statesman.
The warning came as the yields on Spanish 10-year bonds spiked to 6.7pc, pushing the “risk premium" over German Bunds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, the lowest since the dotcom bust in 2003.
Chaos over the €23.5bn rescue of crippled lender Bankia has led to the abrupt resignation of central bank governor Miguel Ángel Fernández Ordóñez, who testified to the senate that he had been muzzled to avoid enflaming events as confidence in the country drains away.
Markets are on tenterhooks as Spanish yields test levels that forced the European Central Bank to respond last November with its €1 trillion liquidity blitz. “Nobody is short Spanish debt right now because they are expecting ECB intervention," said Andrew Roberts, credit chief at RBS. “If it doesn’t come — if we take out 6.8pc — we’re going to see a hyberbolic sell-off," he said.
Italy felt the full brunt of contagion from Spain on Wednesday, with 10-year yileds back near 6pc. The euro fell to a 2-year low of $1.239 against the dollar. Crude oil and metal prices plummeted and save-haven flight pushed rates on 2-year German debt to zero. Gilt yields fell to 1.64pc, the lowest in history.
Mr Roberts said the collapse in Spanish tax revenues is replicating the pattern in Greece. Fiscal revenues have fallen 4.8pc over the last year, and VAT returns have slumped 14.6pc. Debt service costs have risen by 18pc.
The country is caught in a classic deflationary vice: a rising debt burden on a shrinking economic base. “Once you get into such a negative feedback loop, you can move beyond the point of no return quickly," he said.