Spanish debt costs spiral as crisis deepens

Mon May 28, 2012 1:08pm EDT
 
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By Julien Toyer and Sarah White

MADRID (Reuters) - Spanish 10-year borrowing costs neared the 7 percent danger level and Bankia shares hit record lows on Monday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.

Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs - the spread over Germany reached the highest since the euro's launch - on concern about the future of the single currency. He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.

"There are major doubts over the euro zone and that makes the risk premium for some countries very high. That's why it would be a very good idea to deliver a clear message there's no going back for the euro," Rajoy told a news conference.

"There will not be any (European) rescue for the Spanish banking system."

He gave no details of bank recapitalization plans but backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks direct.

Government sources told Reuters Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders - moves which would push the country's debts above the 79.8 percent of economic output which had been expected this year.

"This method has been used by Germany and by Ireland in the past, it is perfectly valid," a government source told Reuters.

The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia. A final decision had not yet been made on which option to take.   Continued...

 
A woman uses a Bankia bank automated teller machine (ATM) in Madrid May 28, 2012. Spanish debt yields jumped and shares in fourth-largest lender Bankia SA plunged to record lows, highlighting a lack of confidence in government efforts to stabilise the finances of Spain and its ailing banks. REUTERS/Sergio Perez