Spain’s bond rate hits danger zone

MADRID — Spain’s struggling banks and the country’s punishing borrowing costs will be the main subject of discussions at this week’s meetings in Brussels of Europe’s finance ministers.

Representatives from the 17 countries that use the euro are to meet late on Monday to discuss the terms of a 100-billion-euro ($125.5-billion) lifeline from other members of the 17-country eurozone for Spain’s banking industry.

The discussions are all the more pressing as Spain’s borrowing costs rose to dangerously high levels Monday.

The interest rate, or yield, on the country’s 10-year bonds hit seven per cent, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the point at which Greece, Ireland and Portugal all sought an international bailout. Stocks on Madrid’s benchmark share index fell 0.7 per cent.

The yield indicates the interest rate a government would have to pay to raise money from financial markets when it holds bond auctions. While Spain can afford the high rates for a few weeks at least, it would find them too expensive in the longer term.

The so-called eurogroup of finance ministers will attempt Monday to reach an agreement on what conditions will be attached to the bailout loan, which will codified in a memorandum of understanding to which Spain must agree. The 17 ministers — some of whom will need to get approval of the agreement from their parliaments — will probably meet again, later in July, to give final approval to that document.

“I expect that already today we will have strong progress on the Spanish situation,” French Foreign Minister Pierre Moscovici said Monday on his way into the meeting.

Spain’s bank industry has been struggling since 2008 under the weight of toxic loans and assets following a collapse in the country’s property market.

In order to determine how much of the 100-billion-euro bailout facility Spain will tap, outside auditors are expected to complete rigorous assessments of Spanish banks by July 31.

Separate stress tests will also be conducted on individual lenders banks to determine how much each bank needs to strengthen its balance sheets against further economic shocks if they can’t raise capital on their own, the official said. These results are due to be published in mid-September.

Investors fear a full-blown bailout of Spanish public finances would be too large for the eurozone to handle. The country’s economy is the fourth largest among the 17 nations that use the common euro currency — behind Germany, France and Italy — and it is also larger than those of Greece, Ireland and Portugal combined.

The interest rate on Spanish 10-year bonds hit a eurozone high of 7.18 per cent in intraday trading on June 18 before closing at 7.12 per cent that day, according to financial data provider FactSet.