Spain debt tension mounts

25 Jul 2012, 4:36 am   -   Source: AAP

Fears are growing that Spain will need a full international bailout, with benchmark 10-year Spanish government bond rates creeping higher.

The major Spanish region of Catalonia says it may seek government rescue aid, as fears grow that Spain will need a full international bailout.

The Spanish stock market plunged for a third day, falling by 3.58 per cent to its lowest close since April 2003, and Spain's borrowing costs rose in a sign of ongoing market tension.

Nerves began to show as Madrid issued a statement on behalf of Spain, France and Italy expressing impatience at a delay to major financial reforms approved by the European Union last month to support banks and growth.

"Speed is an essential condition for the success of any European action," the statement quoted Spain's junior minister for European Affairs, Inigo Mendez de Vigo, as saying.

"There is a worrying delay between the decision taken by the European Council and the execution of said accords."

France quickly issued a denial, however.

"There has been no common approach with Italy and Spain. I have not asked for the immediate application of the accords. It makes no sense to say that. We are following the decisions taken at the European summit and are working on them," European Affairs Minister Bernard Cazeneuve told AFP.

Catalonia's finance minister raised the prospect of a regional bailout, in an interview with BBC Radio.

Asked about whether Catalonia would need to ask for funds from the Spanish state, regional finance minister Andreu Mas-Colell said: "Yes. The current situation is: Catalonia has no other bank than the government of Spain."

The yield or rate of return on the benchmark 10-year Spanish government bond crept higher on Tuesday, at 7.552 per cent, hovering at the levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.

At such high rates, it is impossible to raise funds on the market, said Daniel Pingarron at IG Markets, forecasting that Spain could only hold out for two months.

"Spain currently has about 30 billion euros ($A35 billion) in the treasury. With that, it can cover debt due in July, in August and perhaps in September but in October there is a very large sum due," Pingarron said.

In a fresh debt auction on Tuesday, Spain sold three-month bills at 2.434 per cent, up from 2.362 per cent at the last similar auction in late June.

Six-month bills rose even more sharply, to 3.691 per cent from 3.237 per cent.

Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.

The ECB has done this before but is not clear if it is ready to step in again now without clear backing from the major eurozone states, especially Germany.

"The situation is unsustainable ... the government cannot hold out much longer," said Alberto Roldan at Inversis brokerage.

"October is looking like the deadline."

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