Spain's short-term borrowing costs nearly tripled at auction on Tuesday, underlining the country's precarious finances as it struggles against recession and juggles with a debt crisis among its newly downgraded banks.
The yield paid on a 3-month bill was 2.362 per cent, up from just 0.846 per cent a month ago. For six-month paper, it leapt to 3.237 per cent from 1.737 per cent in May.
Spain has already asked its European Union partners for up to €100-billion in aid for its banks, but financial markets have not eased in their pressure, seeing much of the EU's efforts as only temporary solutions.
"A failure to see much in the way of traction at this week's EU summit, as seems decidedly possible, will likely put further strong additional pressure on Spanish yields thereby rapidly raising the prospect of additional bailouts," said Richard McGuire, strategist at Rabobank.
European leaders meet on Thursday and Friday for their latest attempt to address their 2-1/2 year old debt crisis.
Spain's ability to stop the spiralling of its debt pile amid a tough recession, to clean up its fragile banking system, and to keep its autonomous regions from overspending have kept the country at the centre of worries over a spreading euro zone crisis.
Investor unease at Spain's attempts to do all three means the Treasury has had to rely on domestic banks to sell its debt in recent auctions, strengthening the vicious link existing between sovereign and banking risk.
Economy Minister Luis de Guindos said on Tuesday at a parliamentary hearing that the negotiation of the European financial package to recapitalise Spanish banks was very complex and would take time.
It was dealt a further blow late Monday when Moody's followed up its sovereign downgrade by slashing the ratings of the country's banking system.
The Treasury sold €1.6-billion ($2-billion U.S.) of a 3-month bill, and €1.48-billion of a 6-month bill, which together was just above its €2-€3-billion target.
The Spanish government was forced to pay euro-era high rates on one- and five-year debt last week on expectations Madrid could be forced to seek a full-scale sovereign bailout following a first package targeted only at its banks.
Last week's auction meant Spain has now sold just over 61 per cent of its planned medium– to long-term debt issuance after it took advantage of two bursts of cheap funding from European Central Bank auctions in December and February that encouraged banks to buy sovereign debt.
Since then the country's financing costs have touched euro era record highs. On Tuesday a major risk measure, the difference between its 10-year bond yield and that of Germany, was 517 basis points, down from over 580 hit last week, but up 10 bps from Monday.
The bill auction showed even domestic bank support for the country's debt fading from a month ago. The bid-to-cover ratio on the 3-month was 2.6, down from 3.9 last time, and it was 2.8, compared with 4.3 last time.
Spanish five-year CDS were trading around 585 basis points on Tuesday, having touched a record high above 600 basis points last week.
It now costs $585,000 a year to insure $10-million worth of five-year Spanish sovereign bonds against default. This cost has crept up from closer to $300,000 at the start of the year, reflecting the growing nervousness among investors over the creditworthiness of the euro zone's fourth largest economy.