Spain edges toward rescue as regions seek financial aid

MADRID: Spain's bailout of its regions risks pushing the nation closer to a full international rescue after investors charged the nation more to borrow for five years than for a decade, threatening its access to debt markets.

Spain's five-year borrowing costs briefly rose above 10- year yields on Tuesday, and traded 5 basis points below the 7.57% rate on benchmark 10-year debt at 11.30 am in Madrid. Bonds issued by Catalonia continued to fall after the region said it may tap the government's rescue fund.

"It's almost a waiting game now until they seek a sovereign bailout," Lyn Graham-Taylor, a fixed income strategist at Rabobank in London, said in a telephone interview. The regional bailout plan was "the straw that broke the camel's back," he said.

Economy minister Luis de Guindos will visit Berlin on Tuesday for crisis talks with German counterpart Wolfgang Schaeuble. After taking on as much as 100 billion ($121 billion) of bailout loans to aid banks, the risk for prime minister Mariano Rajoy's government is that the additional burden of helping regions pushes bond yields to unaffordable levels.

The Treasury paid 2.434% on Tuesday to borrow for three months at an auction, selling 3.05 billion of bills, just above its maximum target. The Treasury has focussed on shorter-dated bonds to avoid paying the highest yields, a strategy that is now being undermined as five-year rates rise as high as 10-year yields. The gap between two-year and 10-year yields narrowed to 94 basis points, the lowest since December.

Spain's funding costs are too high for the country to refinance itself in the long term and the situation is "very unpleasant," Thomas Wieser, the head of a group of senior officials that prepares meetings of euro-area finance ministers, said. Spain is "sufficiently funded well into the autumn," he said. "I would hope for us, and for Spain, that the nervousness subsides over the summer, he said in an interview on Austrian radio ORF.