More financial tremors: Spain’s borrowing costs hits new record high

May 28, 2012 – SPAIN – Concerns about Spain’s ability to overhaul an ailing banking system while it tries to shore up its financially shaky regions and plug a gaping budget deficit sent Spanish borrowing costs to a record high Monday, prompting a new call from Prime Minister Mariano Rajoy for the European Union to take action to calm market turmoil. “We need clear statements in defense of the euro and of the sustainability of euro-zone debt,” Mr. Rajoy said in a news conference. Spain’s 10-year government bond yield rose 0.18 percentage point to 6.47% Monday, a new 2012 high, after Spain announced a €19 billion ($23.78 billion) bailout for ailing lender Bankia SA, a dramatic escalation of its efforts to overhaul a banking sector that is grappling with the collapse of a decade long housing boom. Borrowing costs at these levels are considered unsustainable…Spain’s state-backed Fund for Orderly Bank Restructuring, known as the FROB, has around €9 billion left to support ailing banks. The FROB can issue more debt, but Spain’s borrowing costs have spiraled higher at recent auctions, while demand has fallen. A government spokesman said Spain could get around that problem by giving Bankia debt certificates either from the treasury or from the FROB instead of cash. Mr. Rajoy on Monday ruled out the possibility of Spain asking for EU funds to clean up its banks. “There will be no bailout for Spanish banks,” he said. Instead, Mr. Rajoy reiterated his message of recent days that the EU institutions should offer more support for its fiscally frail members, in an apparent call for the European Central Bank to buy debt in secondary markets to bring down borrowing costs. “The EU has to resolve this financing problem,” Mr. Rajoy said. Spanish officials are betting that if they can lower borrowing costs they will be able to tackle all the problem areas in the local economy, even as they aim to slash a budget deficit that stood at 8.9% of gross domestic product in 2011. Another key source of concern are the regional governments, which have to refinance around €30 billion in maturing debt this year but are encountering increasing difficulties obtaining credit from financial markets and even from local banks. –WSJ