Spain’s troubled economy and banking crisis sends its borrowing costs soaring

By DANIEL WOOLLS
Published on 27/06/2012 00:00

SPAIN’S borrowing costs soared in a pair of short-term auctions yesterday as investors worried that the country would not be able to manage an expensive rescue of its ailing banking sector.

The Madrid Treasury auctioned €3.1 billion (£2.5bn) in the two maturities, just above its target range, and demand was strong.

But the cost was very high – an indication that investors are concerned that the Spanish government will be stuck with huge expenses after a European bail-out of its fragile banking system.

The interest rate on three-month bills was 2.36 per cent, nearly triple the 0.85 per cent paid in the last such auction on 22 May. The rate on the six-month bills was 3.24 per cent, nearly twice as much as the 1.7 per cent paid in May.

The auction came a day after Spain formally requested financial aid for its banks from its partners in the eurozone. The move was a formality – it had expressed its intent a week early.

Once again, economy minister Luis de Guindos did not say how much of the €100bn lifeline on offer the country planned to use.

While the bail-out will help the banks, the government is ultimately responsible for repaying the money. That has raised fears that it will be stuck with huge liabilities and that is evident in the country’s borrowing costs.

De Guindos also said no new austerity measures have been set by Brussels as conditions for the loan.

That could irk other bailed-out countries that did have string attached to their rescues. However, on Monday prime minister Mariano Rajoy did say that new “economic measures” were in the works even though the Spanish economy is back in recession. These are widely understood to include an increase in the sales tax, a tax on goods and services.