Spanish bond yields hit euro-era high

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De Guindos Wednesday defended the government as being transparent on what it plans to do with the banking sector. Banks have been asked to set aside another €84 billion to cover for their increasing portfolios of toxic assets, two independent audits of banks' loan portfolios are under way to put precise figures on the extent of the banks' problems, and an IMF report will come out in June.

"We will shine the light on what the consequences of the financial crisis have been for the banks," said de Guindos, who was forced to deny reports that the European Central Bank had rejected an unorthodox idea for Spain to bail out Bankia using government bonds which would be used as collateral for cash from the ECB.

Spain's current banking problems have startling similarities with Ireland. Both countries have fueled unprecedented property building and buying sprees enabled by their 1999 entry into the euro. Joining currency forces with more stable economies such as Germany lowered their credit-risk profiles and gave their banks unprecedented access to international loans at rock-bottom rates.

Spanish and Irish construction firms and property speculators snapped up the cash in expectation that their housing booms, source of easy profits for a decade, would go on forever. Both governments did nothing to slow or regulate the manic building and collected a tax bonanza and record budget surpluses.

But the 2008 global financial crisis started to weaken the Irish and Spanish property bubbles. Ireland hit the wall first, with Spain second — however, it was shielded by the larger size and borrowing power of its economy compared to Ireland, which then was forced to bail out its banks and then seek assistance of its own.

Bankia SA, the result of a merger of Spanish savings banks troubled by toxic property loans, probably could have been saved for less years ago but Spain's previous government did nowhere near enough to shore up Spain's banks, reform labor laws, cut government spending and boost taxes, said Gayle Allard, an economist and labor market specialist at Madrid's IE Business School.

It has fallen to the government of conservative Prime Minister Mariano Rajoy to implement wave after wave of painful austerity measures since January.

Spain also has a credibility problem because of government missteps, with officials until recently denying the need for bank bailouts. De Guindos initially estimated the government would inject €9 billion into Bankia, but the figure rose to €19 billion last week.

"I would say some of the comments from government officials over a period of time in some ways have sort of, if you like, signaled denial in terms of the true position of the banking sector," Miller said.

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Daniel Woolls, Jorge Sainz in Madrid and Shawn Pogatchnik in Dublin contributed to this story.

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