Spanish debt costs spiral as crisis deepens

Mon May 28, 2012 4:33pm 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 on concern about the future of the euro. He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust.

The risk premium demanded by investors to hold Spanish 10-year debt rather than the German benchmark reached its highest since the launch of the euro and closed the day for the first time above 500 basis points, at 511.

"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."

Speaking before Bankia's parent revealed a 2011 loss of 3.3 billion euros - compared to a modest profit previously declared - Rajoy gave no details of recapitalization plans. But he backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks directly.

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.   Continued...