The interest rates that Spain had to offer to sell its latest batch of government bonds shot up on Thursday.
That came after economic data confirmed the eurozone’s fourth largest economy was back in recession and on fears of a bank run at one of its largest lenders.
Madrid had to pay around five percent to attract buyers at an auction of bonds maturing in four years time.
That was way above the 3.374 percent paid the last time such bonds were sold.
Longer term bonds are already close to unsustainable levels as 10-year yields have spiked back above six percent, which investors view as a pivot point that could accelerate a climb to seven percent.
Official data confirmed the Spanish economy shrank by 0.3 percent in the first quarter, putting it back into recession. The country faces a prolonged downturn as the government cuts spending in an attempt to wrestle down its budget deficit.
A major worry for Spain is a banking sector awash with bad loans, from the bursting of the property bubble.
On Thursday the government had to deny a newspaper report that customers of nationalised lender Bankia had withdrawn more than one billion euros in deposits over the past week.
“It’s not true that there is an exit of deposits at this moment from Bankia,” said Economy Secretary Fernando Jimenez Latorre.
Bankia’s president, José Ignacio Goirigolzarri, also tried to reassure calling the bank “extremely strong”.
The government last week took over Bankia, the country’s fourth-largest lender which holds around 10 percent of Spanish deposits, in an attempt to dispel concerns over its ability to deal with losses related to the 2008 property crash.