Spain’s borrowing costs soar amid worries over public finances, banking sector

Spain’s borrowing costs soar

MADRID — Spain’s borrowing costs soared Wednesday to another record amid worries over the government’s finances and financial problems for banks in this troubled euro zone country.

The interest rate gap, or spread, between 10-year Spanish bonds compared to their benchmark German equivalent rose by more than 0.10 percentage point to 2.23 percentage points. A growing gap indicates investors think Spain’s debt is getting riskier.

The increase came a day after the European Union warned Spain it would have to enact more austerity measures to meet its deficit-reduction goals: cutting it from 11.2 percent of gross domestic product last year to 3 percent in 2013. For months Spain has been the focus of worries that its public finances might degenerate into a Greek-style crisis. Greece ultimately needed a bailout after being frozen out of credit markets by prohibitive high interest rates.

The Spanish government prepared Wednesday to approve long-awaited labor market reforms designed to encourage businesses to hire and chip away at a 20 percent jobless rate in a country that has only just crawled out of nearly two years of recession. Unions responded by calling a general strike, but not until late September.

The Finance Ministry adamantly denied the latest in a series of news reports that Spain is headed for some kind of outside financial help. The business daily El Economista said the IMF, the European Union and the US Treasury are preparing a package for Spain that includes a €250 billion credit line.

Deputy Finance Minister Carlos Ocana acknoweledged this week that Spanish banks are having trouble obtaining credit on the inter-bank market. “The situation is a problem,” he said Monday at a business conference Monday.

The chairman of the country’s second largest bank BBVA, Francisco Gonzalez, put it in even blunter terms.

“Financial markets have withdrawn their confidence in our country,” Gonzalez said. “For most Spanish companies and entities, international capital markets are closed.”

Spain faces a key test Thursday with an auction of 10- and 30-year Treasury bonds.

On Tuesday it raised €5.1 billion in an auction of 1-year and 18-month bills but paid a premium through higher interest rates. The auctions were oversubcribed 1.5 and 3.5 times respectively, showing that investors still have an appetite for Spanish debt but demand a bigger return for taking it on.