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Spain's borrowing cost hits a new high

MADRID — Spain's benchmark borrowing rate hit its highest level Tuesday since the country adopted the euro currency, after ratings agency Fitch downgraded 18 banks and investors continued to find more questions than answers in the country's decision to seek help for its ailing bank sector by tapping a $125 billion eurozone bailout fund.

The yield on Spain's 10-year bond yield rose to 6.81 percent in afternoon trading. The bond rate, seen as a measure of a nation's financial health, fell back to 6.67 when markets closed. That's the same level as Spain's previous record — set May 30 as the country's economic woes multiplied. This brings Spain's borrowing costs dangerously close to 7 percent — near the level at which Greece, Ireland and Portugal sought international bailouts.

Spain agreed last weekend to take a European bailout for its banks, tapping into a $125 billion euro area bailout fund, but investors are worried it will not solve the country's problem, as the government may have trouble paying the money back.

Fitch said in a statement that its downgrade of the banks was a result of a previous downgrade of the Spanish sovereign debt on Thursday. Fitch said it had conducted stress tests, both on the Spanish banking sector as a whole and on individual banks, updating results from tests done in 2011.

The ratings agency said the weakness of the Spanish economy would continue to have a negative effect on business volumes, "which, together with low interest rates, will place pressure on revenues."

There has been growing concern that an increasingly large amount of Spanish government debt is being bought by its banks as the country finds fewer international buyers for its bonds. As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it increasingly harder to sell its bonds.

It is not yet clear where the euro area bailout loans will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as the all the other private bond investors. However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments will be given a higher priority than everyone else's — which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain's debt or demand a higher interest rate to compensate for the added risk of losses.

Spain will wait for the results of two independent audits of the country's banking industry before saying how much of the $125 billion it will tap.

While Spain's bailout is designed to prop up its banks, investors are also worried that the Spanish government might eventually be forced into asking for a bailout to help it pay its way. Recession-hit Spain, which has unemployment of nearly 25 percent, is the eurozone's fourth-largest economy. Some analysts fear it may be too large for the eurozone's rescue funds to handle.

Spain's borrowing cost hits a new high 06/12/12 [Last modified: Tuesday, June 12, 2012 10:00pm]
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