The amount of interest that the Spanish government is having to pay to borrow in the medium term has soared again to the highest since the launch of the euro.
At its latest debt auction, Madrid was able to raise all the money it needed from investors but fears about the Spanish bank’s black hole of debt meant it is paying a hefty price to find buyers for its government bonds.
Analyst Javier Barnuevo of CVG said: “It is a good thing when we think short term because our financial needs seem to be covered. But the interest rate is high and that means that it won’t be sustainable long term.”
The bond auction came just hours ahead of an independent report on the state of Spain’s weaker banks which have been hammered by the effects of a property crash and the recession.
Madrid is expected to make a formal request for tens of billions in European Union funds to rescue them.
Banking sources believe the lenders will need to raise a further 60-70 billion euros to improve their capital reserves.
The debt auction proved the Spanish Treasury can still borrow on international markets, albeit at a high cost, and it made the best of solid demand by selling 2.2 billion euros in bonds, above the targeted amount.
“We want to emphasise the strong demand despite the current situation on the markets,” an Economy Ministry source said.
But concerns that Spain might have to take a full sovereign bailout meant that international investors are opting for less risky debt.
While Madrid does not give immediate breakdown of buyers in primary auctions, data shows international investors are steering clear of Spain and have left the often troubled domestic banks to buy up the government’s bonds.