Spanish short-term debt costs reach alarm levels

Wed Jun 20, 2012 11:11am EDT
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By Paul Day and Renee Maltezou

MADRID/ATHENS (Reuters) - Spain lurched closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt on Tuesday.

The soaring borrowing costs showed that a euro zone deal to lend Spain up to 100 billion euros ($126 billion) for its banks had not solved the country's problems or restored investor confidence and suggests more aid may be needed fix its finances.

They also illustrated how Europe's troubles run much deeper than Greece, brought back from the brink of default by Sunday's parliamentary election that has cleared the way for a renegotiation of the terms of its bailout package.

The two-and-a-half year old debt crisis has hobbled the global economy and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.

"The decidedly elevated yield levels leave a question mark firmly in place as regards the sustainability of Spain's public finances while doing nothing to temper speculation as to how long the country might hold out before looking for a more comprehensive bailout," said Rabobank strategist Richard McGuire.

Spain, the euro zone's fourth largest economy, had to pay 5.07 percent to sell 12-month Treasury bills and 5.11 percent to sell 18-month paper - an increase of about 200 basis points on the last auction for the same maturities a month ago. Yields on longer-term bonds are over 7 percent.

The auction underscored the government's increasingly shrill pleas for help from the European Central Bank, two days before Madrid tries to sell three-to-five year bonds.

The ECB believes it can have little lasting influence on market confidence unless euro zone political leaders take bold decisions to strengthen the 17-nation currency zone although President Mario Draghi has hinted at a rate cut.   Continued...

A woman walks pass a foreclosed stall at El Masnou's market, near Barcelona, June 19, 2012. REUTERS/Albert Gea