Spain expected to request bank aid after debt test

Wed Jun 20, 2012 8:04pm EDT
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By Nigel Davies and Robin Emmott

MADRID/BRUSSELS (Reuters) - Spain's borrowing costs will probably hit a new euro era high at a debt auction on Thursday, a few hours before it sheds light on the dire state of its weaker banks and possibly makes a formal request for European Union funds to rescue them.

Madrid should show that it can still borrow on financial markets at the sale of short and medium-term bonds. However, the amount raised will be modest and the price punishingly high as international investors steer clear of Spain, leaving the often troubled domestic banks to buy up the bonds.

Spain faces a hectic day on Thursday as the latest euro zone country in the firing line following Greece, Ireland and Portugal which have already taken sovereign bailouts.

In the morning the Treasury aims to borrow up to two billion euros ($2.5 billion) and in the afternoon the government will release an independent audit of the banks, which have been hammered by the effects of a property crash and a recession.

Then in the evening, Spain could make the formal request for up to 100 billion euros in aid for its weaker banks at a Luxembourg meeting of euro zone finance ministers, who already approved the plan informally earlier this month.

A lack of information on the bank rescue has helped to drive yields on Spanish government debt in recent weeks to levels at which the other struggling euro zone countries had to seek full sovereign bailouts, rather than just aid to recapitalize banks.

"The lack of details right now only serves to damage the situation. I say that as soon as we have the details of the audit, then we should ask for the plan to be enacted," said a senior EU diplomat.

Yields on the secondary bond market indicate that the Treasury's borrowing costs on five-year debt at Thursday's auction will be the highest since 1996, three years before Spain joined the euro. It will also sell two shorter-dated bonds.   Continued...