Spain defends bank rescue as borrowing costs rise

By Alan Clendenning

Associated Press

Published: Wednesday, June 13 2012 6:20 a.m. MDT

The interest rate Spain has to pay on it 10-year-bond — an indication of market confidence on a country's ability to pay off its debt — fell slightly in afternoon trading down from Tuesday's euro-era high of 6.67 percent. The spike in the yield followed a Fitch Ratings downgrade of 18 Spanish banks, predicting the weakness of the Spanish economy would continue having a negative effect on business. Stocks on Madrid's benchmark index were up 1 percent.

It is not yet clear where the euro area bailout loans for Spain's banks will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as the all the other private bond investors.

However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments are supposed to be given a higher priority than everyone else's — which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain's debt or demand a higher interest rate to compensate for the added risk of losses.

Spain will wait for the results of two independent audits of the country's banking industry due by June 21 before saying how much of the €100 billion it will tap. The bailout loans will be paid into the Spanish government's Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country's teetering banks.

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.

AP Business Writers Sarah DiLorenzo and David McHugh contributed from Brussels and Frankfurt.

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