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Spain's Borrowing Costs Rise Again Ahead of Summit

(c) Sky News 2012

Spain's borrowing costs have again hit a level considered unaffordable in the long term as eurozone finance ministers prepared to delay putting a value on a bailout for the country's banks.

The yield on Spain's benchmark 10-year bond reached 7% on Monday morning - meaning that the interest rate Spain pays to borrow money on the markets had once more passed the figure which triggered Ireland (Xetra: A0Q8L3 - news) , Portugal and Greece to seek state bailouts.

While there was no suggestion that the Spanish Government would soon become the fourth - and most high profile - nation to request a rescue package, the yield highlighted the growing pressure on eurozone finance ministers meeting in Brussels to ease conditions facing the country amid a potentially damaging political split.

It has been reported that Spain's deadline to cut its 'excessive deficit' may now be extended to 2014 by the EU at a separate meeting on Tuesday in return for further budget-saving measures.

European leaders hailed the June 28-29 EU summit as a breakthrough, promising fresh capital up to 100bn euros (£790m) for Spain's struggling banks, a European bank union to keep the lenders in line and making it easier for the bloc's new bailout fund to help states in trouble.

Spanish Prime Minister Mariano Rajoy moved on Saturday to try to keep the markets on side, announcing that Madrid would take additional steps soon to cut its public deficit and called for progress on the summit measures.

"What will really determine their success is that they turn into concrete realities, in a supple, quick and effective way," Rajoy said, adding: "Europe (Chicago Options: ^REURUSD - news) must fulfill the accords as swiftly as possible."

French Finance Minister Pierre Moscovici said Monday's meeting would "translate into action" the summit decisions but added that there would be another gathering "in July, on July 20 I think."

German Finance Minister Wolfgang Schaeuble also played down the prospect that Spain would get help for its banks anytime soon, insisting on tighter overall regulation first.

"Before direct aid is given to the banks, there must be a common banking supervisor," El Pais quoted Schaeuble as saying.

It was a comment apparently seized on by investors as evidence that no bank bailout was imminent.

There is also the risk that Finland and the Netherlands will move to block a key agreement made at the EU summit, which aimed to ease Spanish and Italian borrowing costs.

The summit had agreed the potential purchase of Spanish and Italian bonds on the secondary markets using state bailout funds but the Finnish and Dutch Governments fear being dragged into a system of collective responsibility for other nations' debts.

Italian prime minister Mario Monti, in an apparent reference to Finland and the Netherlands, on Sunday attacked unnamed "northern" EU states for undermining eurozone "credibility" by challenging the positive view of the summit conclusions.