Spain borrowing cost crisis: Rate at euro-era high

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In a report released late last week, the International Monetary Fund estimated Spain needs around €40 billion to prop up banks hurting from an unprecedented real estate boom that went bust.

Investors also want to know whether Spain will ask for a safety margin of extra money to cushion itself against a further shock, such as a deterioration in the economy.

While Spain's bailout is designed to prop up its banks, investors are also worried that the Spanish government might eventually be forced into asking for a bailout to help it pay its way. Recession-hit Spain, which has the eurozone's fourth-largest economy with unemployment of nearly 25 percent, may be too big for the eurozone's rescue funds to handle.

Spain is also getting punished because of fears Greek elections on Sunday will hand a victory to the radical left-wing Syriza party, campaigning on a pledge to refuse to comply with terms of that country's bailout package. This could eventually push Greece out of the euro, further destabilizing the currency group.

"The idea of the Spanish bailout was to calm the market in case the Greek elections do not turn out as the EU would like," said Gary Jenkins, director of Swordfish Research Ltd.

"However the end result was to create more volatility and create more concern."

Once it became clear that the rescue money for Spain's banks would not solve that country's problems, investors have turned their attention to Italy, whose economy is larger than Spain's.

Italy didn't suffer through a real estate bust, so its banks are in better shape. But like nearly half of the countries in the euro, its economy is shrinking, making it difficult for the government to chip away at a mountain of debt. Italian bond yields also rose to worrying highs on Tuesday, hitting 6.02 percent, its highest level since January.

"Although Italian banks are relatively sound compared to the Spanish counterparts, without the heavy weight of toxic real estate bubble and are much less exposed to the government bonds, the real question is whether the country can grow itself out of the recession," said Anita Paluch of Gekko Global Markets.


Associated Press Writer Daniel Woolls contributed from Madrid.

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