Spain bank fears send bond yields to euro-era high

May 31, 2012 • Business

A passenger walk among rubbish and paper during a strike by the cleaning staff against budget cuts at Barcelona’s airport in Barcelona, Spain, Wednesday, May 30, 2012. (AP Photo/Manu Fernandez)

MADRID (AP) — Investors worried about the viability of Spain’s banks sent the country’s borrowing costs into the danger zone Wednesday and pummeled European stocks, spooked about whether the Spanish government can pay for a bailout of a banking sector saddled with toxic loans and piles of foreclosed property born from a decade-long building frenzy.

Doubts over how recession-hit Spain will handle a €19 billion ($23.6 billion) injection into troubled lender Bankia helped drive the interest rate on Spanish 10-year bonds up to 6.67 percent, the rate reported by financial data provider FactSet.

This marked the same level on the key gauge of how Spain can handle its debts as a euro-era high reached in November, just after Spanish voters ousted Socialists blamed for failing to manage the financial crisis and gave a landslide victory to a conservative administration.

Despite months of painful austerity reforms by the new government, there is growing concern that Spain’s new leaders have not done enough and more Spanish banks may need to be saved amid mountains of loans gone bad and foreclosures of property now worth far less than the loans paid out to build it.

Some estimates put a complete Spanish sector bailout cost at between €50 billion and €150 billion. But Spain only has €5 billion left in the €19 billion bank bailout fund it established in 2009. This means the country will have to raise the money in bond markets.

Spain is a weak link in Europe not only because of its banks, but also because of poor economic growth prospects looking grim with little hope of improvement anytime soon. The economy is mired in its second recession in three years and forecast to shrink 1.7 percent for the year. Login to read more

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