Spain crisis deepens as borrowing rates soar

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MADRID — Spain’s borrowing costs broke through another record Thursday after a credit ratings agency downgraded the country’s ability to pay down its debt amid rising fears a bank bailout may not be enough to save the country from economic chaos.

The interest rate — or yield — on the country’s benchmark 10-year bonds rose to a record 6.96 percent in intraday trading Thursday, its highest level since Spain joined the euro in 1999 and close to the level which many analysts believe is unsustainable in the long term.

The ratings agency Moody's downgraded Spain’s sovereign debt three notches from A3 to Baa3 Wednesday night, leaving it just one grade above “junk status”.

Moody's said the downgrade was due to the offer from eurozone leaders of up to €100 billion ($125 billion) to Spain to prop up its failing banking sector, which the ratings agency believes will add considerably to the government’s debt burden.

The lowered score means that even fewer investors will buy Spanish debt, because organizations like pension funds are mandated to avoid assets with such low creditworthiness.

Spain won’t immediately collapse if the rate hits 7 percent, but reaching that point would affect it at Tuesday’s scheduled debt auction.

“The clock is definitely ticking,” said Michael Hewson, an analyst with CMC Markets.

The bank bailout is intended to recapitalize the Spanish banking system and calm Europe’s debt crisis. Instead, investors seem unnerved by the government taking on extra debt and have pushed Spanish bond yields — a measure of market jitters — higher all week.

Economy Minister Luis de Guindos called for calm, saying that Spain “had a road map” on how to resolve the crisis.

Meanwhile Foreign Minister Jose Manuel Garcia-Margallo compared sharing the common currency to sailing in a ship, “If the Titanic sinks, it takes everyone with it, even those travelling in first class,” he said.

Moody's said the Spanish government’s ability to raise money on global markets was being hindered by high interest rates, a situation which had led it to accept eurogroup funds to recapitalize debt-burdened banks.

Some details of what the bailout might look like began to emerge Thursday. European officials are considering liquidation — selling off a bank’s assets — as part of the plan to prop up the Spanish banking sector, a spokesman for Competition Commissioner Joaquin Almunia said.

“Liquidation is always looked at,” said Antoine Colombani. “We prefer to liquidate when it’s cheaper for the taxpayer.”

This action was rebutted in a statement Thursday by the Spanish government’s Fund for Orderly Bank Restructuring (FROB).

The fund said it had “no plans to initiate insolvency proceedings or wind up any credit institution under its management or control.”

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