Spain's short-term debt costs jump

Spain's short-term debt costs jump
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Spain’s short-term borrowing costs nearly tripled at its latest auction of government bonds.

The almost three-fold increase in interest rates Madrid is having to offer underlined the country’s precarious finances.

The yield paid on a 3-month bill was 2.362 percent, up from just 0.846 percent a month ago. For six-month paper, it leapt to 3.237 percent from 1.737 percent in May.

The problem is the financial markets see the 100 billion euros in European Union aid for Spain’s newly downgraded banks as only temporary solutions amid the recession and debt crisis.

Spain’s ability to stop the spiralling of its debt pile amid a tough recession, to clean up its fragile banking system, and to keep its autonomous regions from overspending have kept the country at the centre of worries over a spreading euro zone crisis.

Investor unease at Madrid’s attempts to do all three means the Treasury has had to rely on Spanish banks to sell its debt in recent auctions, strengthening the vicious link existing between sovereign and banking risk.

Economy Minister Luis de Guindos said on Tuesday at a parliamentary hearing that the negotiation of the European financial package to recapitalise Spanish banks was very complex and would take time.

It was dealt a further blow late Monday when Moody’s followed up its sovereign downgrade by slashing the ratings of the country’s banking system.

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