Spain's finance minister insisted again Wednesday that the country does not need a full-blown bailout, even as the country's sky-high borrowing costs remained at dangerous levels.
The interest rate, or yield, on the Spanish benchmark 10-year bond fell 22 basis points to 6.78 percent, below the 7 percent level it has been hovering above since Monday. Such high rates are considered by market-watchers to be unsustainable over the long term and eventually forced Greece, Ireland and Portugal to ask for international financial help.
But Finance Minister Cristobal Montoro told Parliament that Spain won't need the same kind of assistance "because it does not need to be rescued."
However, after years of insisting its banks were among the healthiest in Europe, Spain recently acknowledged it will need a rescue package to protect the sector from a property boom that went bust in 2008. But investors are now more concerned that the country itself may have to be bailed out and this could seriously test the strength of the entire European Union's finances.
Worries about Spain's ability to repay its debt grew last week when the country agreed to accept a eurozone loan of up to €100 billion to shore up its ailing banks, which are sitting on massive amounts of soured real estate investments.
The big fear is that, as the money will count as a loan and raise Spain's overall debt load, the country's financing costs will suffocate the government as it tries to wade its way through a recession and a 24.4 percent jobless rate.
Because the government is ultimately responsible for repaying the banks' bailout money, the deal has increased fears about the size of public debt. If the government cannot get the bailout money back from the banks, it will be saddled with the losses.
Those losses could prove too much to handle for the government, which is already struggling with a second recession in three years and unemployment of nearly 25 percent, the highest jobless rate among the 17 nations that use the euro.
The high borrowing costs that Spain has to pay to get investors to buy up its debt also indicates that there is very little interest for its bonds. Spanish banks — already burdened with toxic loans and assets — have been buying up the bonds, which are being used to help prop up the banks — trapping Spain and its banks in a vicious circle of debt.
Independent audits on the state of Spain's banks are due Thursday and these will help Spain determine how much it needs from a €100 billion ($126 billion) lifeline the 17-nation eurozone has agreed to be set up. It is not clear when the government will release details of the audits.
Spain also tests market sentiment Thursday when it looks to auction €2 billion in debt maturing in 2014, 2015 and 2017. A bond auction Tuesday saw healthy demand but sharply increased interest rates.
The EU, meanwhile, is said to be working on structuring a bank bailout so that it would cause least strain on Spanish government debt. Institutional rules mean the money from European bailout funds must be given directly to Spain.
Montoro told Parliament that Spain was now in a better situation to confront the crisis thanks to the austerity measures and banking and labor reforms the government has rushed in since taking office in December.
Labor unions have called a new round of demonstrations throughout Spain later Wednesday to protest the reforms.
Earlier, Moody's ratings agency downgraded ratings for Spanish telecommunications company Telefonica S.A., citing concern over the ailing economy and the impact this would have on consumer spending and Telefonica's domestic revenues.
Moody's downgraded Spain's government bond ratings to Baa3 from A3 earlier this month.
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