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Spain Pays Higher Price For Euro Jitters

(c) Sky News 2012

Spain's ability to finance itself has been called into question again after investors demanded a euro-era record interest rate for the debt-laden country at its latest bond auction.

Madrid managed to sell 3bn euros (£2.35bn) in medium-term debt but the yield on the five year bonds grew to 6.46% compared to 5.54% at the last auction just a fortnight ago.

In another clear indication of a lack of investor confidence in Spain - and the eurozone's £100bn euro plan to rescue its banks - the interest rate on its 10 year bonds today crept back up above 7%, the level seen as unsustainable in the long term.

It means Spain is having to pay far more than it can afford to borrow money.

Today's auction, which meant Spain had to pay far more than it can afford to borrow money,  was held against the backdrop of a Parliamentary debate on a controversial package of tax hikes and civil service pay cuts that have triggered daily protests.

Treasury Minister Cristobal Montoro, who recently declared there was "no money" to pay civil servant wage demands because of the recession, said Spain could simply not go deeper into debt.

"Financing public services with more deficit and more debt will doom us," he told MPs (BSE: MPSLTD.BO - news) .

The austerity package proposed by the centre-right government is designed to save an additional 65bn euros (£51bn) through 2015.

It is expected to win passage but without support from any opposition parties.                  

A nationwide wave of rallies is planned for Thursday evening - hours before a conference call of eurozone finance ministers on Friday which will discuss progress on the Spanish bank bailout.

There is speculation the 100bn euro package may even get the green light, especially if it clears a hurdle in the German Parliament on Thursday.

The result of today's auction by Spain triggered a fall in the value of the euro and trimmed gains on European stock markets.

Shares fell further when the European Commission moved to clarify its position that the bank bailout could not be used by Spain for any other purpose but to recapitalise lenders in the wake of the collapse of the country's property bubble.

Market strategist at RBS (LSE: RBS.L - news) , Harvinder Sian, said of Spain's plight: "The general context is that these guys aren't getting much love from the bond market."