Spain's borrowing costs rise, stocks sink following bank rescue
MADRID -- Spain's borrowing costs flirted with record highs Monday and stock prices sank on the first trading day since Madrid agreed to give $24 billion of taxpayers' money to rescue its largest real estate lender.
The country's prime minister vigorously denied Spain would need international aid to foot the bill for shoring up its banks, but markets appear to believe otherwise.
Spanish stocks closed near nine-year lows, and the euro lost ground to the dollar, on persistent fears that Spain cannot afford to bail out Bankia, its fourth-largest bank but the biggest in property loans. Spanish lenders are drowning in unpaid construction loans and foreclosed properties worth a fraction of their sale price just four years ago.
At one point Monday, Bankia's stock lost nearly a third of its value, before closing down 13% for the day.
Rising bond yields reflect investors' concern that Madrid might not repay its debts. The cost of rescuing Spain's entire banking sector would likely exceed the price tag for bailing out Greece. But Spanish Prime Minister Mariano Rajoy on Monday again denied any need for international aid.
"You will not see any [outside] rescue for Spanish banks. Next question," Rajoy said curtly at a news conference.
The yield on benchmark 10-year Spanish debt -- reflecting how much interest the country has to pay buyers of its bonds -- brushed 6.5% on secondary markets, dangerously close to the 7% threshold that triggered bailouts for Greece, Portugal and Ireland. Above that much, it is considered too expensive for any country to borrow on markets.
Rajoy blamed Spain's high bond yields on overall worries about the Eurozone, the 17 nations that use the euro currency. Depending on the results of a new round of elections next month, Greece could default on its debt or decide to leave the shared currency, though a weekend poll showed increased public support for political parties that intend to fulfill agreements tied to the country's international bailout.
"There are major doubts over the Eurozone and that makes the risk premium for some countries very high," Rajoy said. "That's why it would be a very good idea to deliver a clear message there's no going back for the euro."
Rajoy has previously called on the European Central Bank to enact emergency measures that would allow it to buy government debt directly. The ECB currently can buy government bonds only on secondary markets. Rajoy also wants the Eurozone bailout fund, scheduled to be online in July, to be able to lend to banks directly.
Local media also reported Monday that Spanish officials were weighing whether to recapitalize Bankia not with cash, but with treasury bonds. That would allow the European Central Bank to buy those bonds from the nationalized bank, infusing it with cash that the Spanish government might not otherwise have.
The method could also be used to rescue several other Spanish banks, some of which recently had their creditworthiness downgraded to junk status.
Photo: Visitors pose for pictures under the main display at the Stock Exchange in Madrid on Monday. Spanish Prime Minister Mariano Rajoy was adamant that Spain's bank sector would not need an international rescue as concern over the bailout fund for lender Bankia sent that bank's stock price plummeting while Spain's borrowing costs soared. Credit: Daniel Ochoa de Olza / Associated Press.