Spain borrowing costs ease amid crisis aid hope

MADRID – Spain's borrowing costs edged lower Wednesday on hopes that the European Union may be moving closer toward adopting creative measures that could alleviate the country's financial crisis and spare it the embarrassment and political damage that would come from being forced to ask for a bailout of its banking sector.

The interest rate — or yield — that Spain must pay in the secondary market on its 10-year bonds closed at 6.25 percent, five basis points below the rate a day earlier, according to financial data provider FactSet. The spread, or difference, with the equivalent safe-haven German yield fell below 5 percentage points for the first time in more than a week.

The drop in yields comes a day after the most explicit suggestion from the Spanish government that it is seeking help from Europe for its struggling banks , and a warning from the finance minister that the country risks losing access to credit from international financial markets.

Finance Minister Cristobal Montoro warned Tuesday that the high-risk premium of recent weeks indicated "the door to the markets is not open for Spain."

Meanwhile , Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unity — a step that might allow its troubled banks to get direct financial help without forcing the new conservative government to ask for outside help that it insists it has no plans to seek.

European leaders will meet at the end of June to look at ways to stop the 17-country eurozone from collapsing. The European Commission and the European Central Bank are expected to present measures at the meeting for creating a "banking union" that would oversee banks and possibly offer bailouts directly, bypassing national governments.

But that could come too late for Spain, seen as one of the weakest links in the 18-nation eurozone because investors fear it could be forced to seek an international bailout of its public finances if it is overwhelmed by the cost of rescuing its banks.

Some of the banks are sitting on massive amounts of toxic property investments following the bursting of a real estate bubble, plus the economy is in recession with nearly 25 percent unemployment and grim prospects for recovery.

At the end of May, Spain's most stricken lender, Bankia S.A., said it needed €19 billion ($23.62 billion) in government aid to shore up its finances against losses on its toxic home loans. But Spain only has €5 billion left in a €19 billion fund that it established in 2009 to help banks. The government has promised to help Bankia but has not mapped out a plan except to say that options include raising the funds via bonds or getting European help without a bailout.

The uncertainty over how Spain's troubled banks will be saved has sent the yield on Spanish debt to dangerously high levels and close to the crucial 7 percent ceiling — a point at which other eurozone countries such as Greece, Ireland and Portugal sought a bailout. Spain is also a focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would stretch the region's finances to breaking point.

Spain is eager for its banks being able to seek help on their own because if the government were to ask for it from the EU bailout fund, it would essentially constitute the beginning of a bailout. This international assistance would come with strings attached — its fellow countries in the 17-nation eurozone and the International Monetary Fund could impose certain policies on the Spanish government, something the country is keen to avoid.

But Germany appeared to pour cold water over Spain's maneuvers with Volker Kauder, parliamentary leader of German Chancellor Angela Merkel's conservative bloc, telling ARD television Wednesday that the Spanish government must tap the eurozone bailout fund under current rules to help its troubled banking sector because the money cannot go straight to a Spanish bank rescue fund.

Kauder said there is discussion over whether aid could go directly to a Spanish bank rescue fund — but "I don't see this possibility." He said the rules of the European Financial Stability Facility only allow countries to apply for the help, and that banks can't ask on their own.

The Spanish government has said that the amount of money needed to prop up its troubled banking sector is not excessively high and would be easily manageable under a system of greater Europe banking unity. Estimates have put the cost of a complete bailout for the Spanish banking sector between €40 billion and €100 billion.

Economy Minister Luis de Guindos said Wednesday that an IMF report on Spain's banks will be completed next Monday while two international auditing firms contracted to pinpoint the extent of the troubled banks' problems will issue their reports at the end of the month.

De Guindos and Rajoy have repeatedly said Spain has no plans to seek an external rescue package for the country's banks.

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Alan Clendenning and Geir Moulson contributed to this report from Madrid and Berlin.