Fears push up Spain borrowing costs

Spain has paid sharply
higher interest rates to raise 2.5 billion euro (£2 billion) in a
medium-term debt auction, reflecting fears it will be caught up in the
fallout of the Greek crisis.

Meanwhile a recently nationalised Spanish bank's shares plummeted after a newspaper said depositors were rushing to withdraw money.

Investors worry that a messy Greek exit from the currency bloc could destabilise Spain's financial sector. The concern is that the banking sector might not be able to meet tough new provisioning requirements and require bailouts if concerns about their stability worsen.

The government, meanwhile, risks needing a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with austerity measures draining money from the economy.

Prime Minister Mariano Rajoy has warned that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.

The Treasury today sold three kinds of bonds, two maturing in 2015 and one in 2016. For the three-year note, the only one which was comparable to previous sales, Spain's borrowing rate - or yield - rose to 4.87%, from 4.04% in a similar auction on May 3.

On the secondary market, where issued bonds are traded freely, the interest rate on Spanish 10-year bonds stood at a worryingly high 6.34%. It has risen sharply from below 5% in March and is edging toward the 7% mark that is considered unsustainable in the longer term.

Greece, Ireland and Portugal sought bailouts when their 10-year bond yields remained stuck above that level.

The spread, or difference, between Spain's 10-year debt yield and that of the safe-haven German bonds was 4.85 percentage points. Investor appetite in the auction was nevertheless strong, with demand covering the amount on offer between two and 4.5 times.

Tensions remained high in the markets, where shares in Bankia, the recently nationalised bank, plunged by more than 20% on a newspaper report that customers have withdrawn more than one billion euro (£800 million) since the state took it over last week.

The shares plunged 22% to 1.35 euro by the afternoon after falling as much as 27% in the morning. That helped push the broader Ibex 35 stock index down 2%. Other banks also saw their share price fall with Banco Santander SA down 3%.

The newspaper El Mundo reported it had obtained access to data presented at a Bankia board meeting yesterday which said depositors had withdrawn one billion euro since last Wednesday, the day the nationalisation was announced. The bank is Spain's fourth-largest and is heavily exposed to country's collapsed property market, with 32 billion euro (£26 billion) in assets deemed problematic.