Spain borrowing rate soars, banking rescue nears

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Spain's borrowing costs soared in a major market test Thursday, the day Madrid reveals the price of a vast banking rescue that has stoked fears of a full-blown bailout.

Spain showed it can still tap the bond market at a pivotal time, with a eurozone rescue loan of up to 100 billion euros ($125 billion) in the works and fears mounting that a state bailout could follow.

The Treasury raised 2.22 billion euros, beating its own target, and demand outstripped supply by more than three times for the mixture of two-, three- and five-year bonds, Bank of Spain figures showed.

But it had to pay soaring rates to lure investors.

The yield more than doubled to 4.706 percent from 2.069 percent at the last comparable sale March 1 for two-year bonds, a sign of deep misgiving about Spain's near-term prospects.

The rate on three-year bonds climbed to 5.457 percent from 4.876 percent on May 17; while for five-year bonds it leapt to 6.072 percent from 4.960 percent on May 3.

Spain's eurozone partners agreed on June 9 to lend up to 100 billion euros to save stricken banks that made reckless loans during a real estate bubble that imploded in 2008.

The Spanish government says the size of the banking rescue loan will depend on two audits of the banks due later Thursday, one from the German firm Roland Berger, the other from the US firm Oliver Wyman.

With those audits in hand, the government is officially to request a banking sector rescue.

In Brussels, a source said Spain would lodge the request at a eurozone meeting in Luxembourg later in the day. Another eurozone source said the amount would be "well within" the maximum 100 billion euros.

Far from calming markets, the banking rescue pushed Spain's borrowing rates to the highest levels since the birth of the euro in 1999 as investors fretted over the impact of the loan on Spain's booming debt.

The banking bailout further undermined confidence because it lacked details such as the price and conditions while highlighting Spain's difficulties in raising money on the markets.

Yields eased this week after a Group of 20 summit in Los Cabos, Mexico, raised expectations that European Union authorities could step in to help Spain and Italy, possibly by purchasing their bonds.

© 2012 AFP

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