Spain on the brink as borrowing costs soar to unaffordable levels

SPAIN’S borrowing cost rose to dangerously high levels yesterday as finance ministers of the 17 countries that use the euro began to gather in Brussels to discuss terms of a rescue package for the country’s stricken banks.

The interest rate, or yield, on the country’s ten-year bonds rose 16 basis points to 7.03 per cent, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the level at which Greece, Ireland and Portugal all sought an international bailout. Stocks on Madrid’s benchmark index fell 1.5 per cent.

The yield indicates what rate a government would have to pay to raise money from financial markets when it holds bond auctions. While Spain can afford the high rates for a few weeks at least, it would find them too expensive in the longer term.

Spanish officials had originally indicated that it would decide yesterday how much the country’s troubled banks would get from a €100 billion (£79 billion) lifeline from other members of the 17-country eurozone. Spain’s bank industry has been struggling since 2008 under the weight of toxic loans and assets following a collapse in the country’s property market.

But an official with Spain’s economy ministry said last week that the meeting was not expected to generate a figure for how much Spain would tap.

Ministers planned to discuss terms of the loan and may or may not finalise them, said the official. Outside auditors are expected to complete rigorous assessments of Spanish banks by 31 July. Stress tests will also be conducted on banks to determine how much each needs to strengthen its balance sheet against further economic shocks if they cannot raise capital, the official said.

Investors fear that a full-blown bailout of Spanish public finances would be too large to handle. The country’s economy is the fourth largest of the 17 nations using euro currency – behind Germany, France and Italy.

A European Union official said Spain may be given an extra year to meet its budget deficit target of 3 per cent.

The official said finance ministers from the 17 eurozone countries will consider the extension to 2014. Another official said ministers hope to achieve a “political understanding” of conditions for a bailout loan for Spain’s banks. The “understanding” will need to be approved by each eurozone country.