MADRID: Fears of a full-scale bailout for Spain mounted yesterday as its borrowing costs spiked to danger levels on concern over the nation's stricken banks and fast-rising debt.
After Greek elections averted the immediate threat of Athens exiting the euro zone, concern turned to Spain where the banks have been thrown a euro zone lifeline of up to 100 billion euros ($127 billion).
As Greece's pro-bailout parties negotiated the terms of a coalition government, Spain's troubles mounted.
Tapping the markets for the first time since the Greek vote on Sunday, Spain raised 3.04 billion euros, beating its 2.0-3.0-billion-euro target in an auction of 12- and 18-month notes.
But it had to pay exorbitant rates to lure investors — 5.074 percent for 12-month debt and 5.107 percent for 18-month debt.
The yield on Spanish benchmark 10-year government bonds shattered the 7.0-percent barrier on Monday for the first time since the creation of the euro in 1999, pushing above 7.2 percent.
Yesterday, the yield on 10-year bonds was at 7.003 percent.
"It now appears inevitable that Spain will require a sovereign bailout, possibly very soon," said Capital Economics chief European economist Jonathan Loynes.
Rising bond yields reflected a belief that the banking bailout, agreed with euro zone partners on June 9, would not address broader fiscal problems, he said.
Spain's plan to cut the public deficit from 8.9 percent of economic output last year to 5.3 percent this year and 3.0 percent in 2013 relied on a "very unlikely" recovery from recession next year, Loynes said.
Markets held out little hope for quick help from Europe.
The leaders of Italy, France, Germany and Spain will hold a summit on the euro zone crisis on June 22 in Rome, ahead of a full European Union summit from June 28-29.
Kathleen Brooks, research chief at brokerage Forex.com, said Spain could avoid a rescue only if its debts were underwritten by stronger euro zone partners and if the European Central Bank bought its debt.
"But at the rate its yields are rising, Spain doesn't have enough time to wait for Europe's politicians to decide whether or not to underwrite the debts of the weakest states, it needs action now."
Spain, the euro zone's fourth-biggest economy, faces its next debt market test tomorrow, when it will try to raise up to two billion euros in a mix of two-, three- and five-year bonds.
In a sign that the crisis is reaching into the heart of the euro zone, investor confidence in Germany took its steepest fall in 14 years in June, according to a survey.
The ZEW think tank's economic expectations index, having fallen by more than 12 points last month, plunged a further 27.7 points this month to minus 16.9 points, the lowest level since January.
Though Greece seemed to be closing in on forming a new government, few investors believed its problems were over.
Greece's New Democracy conservatives were negotiating a coalition with socialists Pasok and the Democratic Left after winning more votes than radical leftists Syriza, who want Greece's EU-IMF bailout deal torn up.
"The euro zone crisis is entering a dangerous and existential phase with the rise in Spanish bond yields pointing to the need for a (Spanish) bailout while in Greece, the political situation looks fragile and not strong enough to diminish the scenario of a Greek exit," said Neil MacKinnon, an analyst at VTB Capital financial group.
Michael Hewson, senior market analyst at CMC Markets UK, said a draft communique by Group of 20 leaders in Mexico had failed to instill market confidence in the euro zone.
"The markets clearly weren't listening," he said.
The draft communique seen by AFP said: "All G20 members will take the necessary actions to strengthen global growth and restore confidence."
It promised that euro zone members would safeguard the stability of the single currency in the face of volatile markets.
The draft gave no hint that German Chancellor Angela Merkel or her allies might allow the ECB to pump out cash or to pool German debt with that of the weaker euro zone members to create low-interest euro bonds.
"Discussion here has been balanced: We need the right mix of consolidation and growth stimulus at the same time," Merkel told reporters.
Adding to a sense of uncertainty in Spain, a financial source said that a second audit of Spain's banks had been delayed from end-July to September. It is to follow a first exam whose results are due by tomorrow.
The first audit will decide how much of the euro zone's 100 billion euros is required to secure the banks, many loaded up with bad loans extended in a property bubble that collapsed in 2008.
If Madrid withdrew the full loan, its public debt would approach 90 percent of economic output by the end of the year.
