Spain borrowing rate at euro-era high

Cost rises after bank downgrades, questions arise over bailout details

Associated Press  Tuesday, June 12, 2012

Workers leave the stock exchange after trading finished for 

the day, in Madrid, Tuesday June 12, 2012. Spain's benchmark borrowing rate hit its highest level Tuesday since the country adopted the euro currency, after ratings agency Fitch downgraded 18 banks on Tuesday and investors continued to find more questions than answers in the country's decision to seek help for its ailing bank sector by tapping a euro 100 billion ($125 billion) eurozone bailout fund. (AP Photo/Paul White)

MADRID — Spain's benchmark borrowing rate hit its highest level Tuesday since the country adopted the euro currency, after ratings agency Fitch downgraded 18 banks and investors continued to find more questions than answers in the country's decision to seek help for its ailing bank sector by tapping a $125 billion eurozone bailout fund.

The yield on Spain's 10-year bond yield rose to hit 6.81 percent in afternoon trading, according to data provider FactSet, while stocks seesawed between positive and negative territory and ended the day almost unchanged, up 0.1 percent.

The bond rate seen as a measure of a nation's financial health fell back to 6.67 when markets closed. That's the same level as Spain's previous record — set on May 30 as the country's economic woes multiplied, and last November after the then-ruling Socialist Party was ousted by the conservative Popular Party now struggling to keep the national afloat financially. This brings Spain's borrowing costs dangerously high to 7 percent — close to the level at which Greece, Ireland and Portugal sought international bailouts.

Spain agreed last weekend to take a European bailout for its banks, but investors are worried it will not solve the country's problem as the government may have trouble paying the money back.

Fitch said in a statement that its downgrade of the banks was a result of a previous downgrade of the Spanish sovereign debt on June 7. Fitch said it had conducted stress tests, both on the Spanish banking sector as a whole and on individual banks, updating results from tests done in 2011.

The ratings agency said the weakness of the Spanish economy would continue to have a negative effect on business volumes "which, together with low interest rates, will place pressure on revenues."

There has been growing concern that an increasingly large amount of Spanish government debt is being bought by its banks as the country finds fewer and fewer international buyers for its bonds. As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it increasingly harder to sell its bonds.

One hope among eurozone politicians is that the (euro) 100 billion loan facility will help shore up Spanish banks' balance sheets, thereby giving them back the ability to loan money to businesses and individuals — and also buy more government debt. However, Spain is in danger of being trapped in a vicious debt circle. The loan facility will increase the Spanish government's debt load and it will have to find more buyers for its bonds — which will send borrowing costs even higher. This could push Spain's government to ask for a bailout of its own.

The rescue package for Spain's crippled lenders was announced Saturday by finance ministers from the 17-country euro area, but the exact amount the country's banks will receive has not yet been published.