Spain’s borrowing costs rise, stocks sink following bank rescue

The yield on benchmark 10-year Spanish debt — reflecting how much interest the country has to pay buyers of its bonds — brushed 6.5% on secondary markets, dangerously close to the 7% threshold that triggered bailouts for Greece, Portugal and Ireland. Above that much, it is considered too expensive for any country to borrow on markets.

Rajoy blamed Spain’s high bond yields on overall worries about the Eurozone, the 17 nations that use the euro currency. Depending on the results of a new round of elections next month, Greece could default on its debt or decide to leave the shared currency, though a weekend poll showed increased public support for political parties that intend to fulfill agreements tied to the country’s international bailout.

“There are major doubts over the Eurozone and that makes the risk premium for some countries very high,” Rajoy said. “That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro.”

Rajoy has previously called on the European Central Bank to enact emergency measures that would allow it to buy government debt directly. The ECB currently can buy government bonds only on secondary markets. Rajoy also wants the Eurozone bailout fund, scheduled to be online in July, to be able to lend to banks directly.

Local media also reported Monday that Spanish officials were weighing whether to recapitalize Bankia not with cash, but with treasury bonds. That would allow the European Central Bank to buy those bonds from the nationalized bank, infusing it with cash that the Spanish government might not otherwise have.

The method could also be used to rescue several other Spanish banks, some of which recently had their creditworthiness downgraded to junk status.

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–Lauren Frayer

Photo: Visitors pose for pictures under the main display at the Stock Exchange in Madrid on Monday. Spanish Prime Minister Mariano Rajoy was adamant that Spain’s bank sector would not need an international rescue as concern over the bailout fund for lender Bankia sent that bank’s stock price plummeting while Spain’s borrowing costs soared. Credit: Daniel Ochoa de Olza / Associated Press.

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