Spain borrowing costs rise as economic fears grow

A Spanish flag flies over a military building with a symbol of the Franco era in Barcelona Thursday Oct. 11, 2007. Statues, street names and other symbols honoring Gen. Franco and his 40-year rule would be eliminated under a bill, presented by ruling Socialist Party, that seeks to make amends to victims of the Spanish Civil War. (AP Photo/Manu Fernandez)

(MoneyWatch) Spain's borrowing costs are rising on concerns about its eroding economy and Greece's possible exit from the eurozone.

Although the Spanish government on Thursday held a successful bond auction, raising $3.18 billion, it is being forced to offer a higher interest rate to compensate investors for what they perceive as the greater risk around holding the sovereign debt.

Spain faces shrinking consumer spending, exports, and GDP. The country's GDP fell 0.3 percent in the first quarter of the year, following a drop of the same size in the previous quarter, according to the Madrid-based National Statistics Institute. Household spending contracted 0.6 percent from a year earlier, while exports rose 2.2 percent, slowing from 5.2 percent in the previous quarter.

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In another worrying sign, customers of Spanish lender Bankia have pulled $1.3 billion in deposits from the financial institution, the nation's fourth-largest bank, after it was partially nationalized earlier this month. The amount withdrawn from Bankia is equivalent to around 1 percent of the lender's retail and corporate deposits. Although that does not immediately endanger the bank, fears are that more despositors could withdraw their funds.

Spain took Bankia over May 9 in an effort to calm worries about the bank's ability to deal with losses related to the 2008 housing crash. Reuters, citing an unnamed source close to the bank, said money had been leaving Bankia even before the nationalization. "I think that's why the government stepped in to nationalize it so quickly," the source told the wire service.

Amid fears of a possible bank run, the Spanish government has asked outside financial consultants to assess the health of the nation's lenders, according to the Financial Times. The analysis will examine the difference for all of Spain's banks between the book value of their loans, their current value on a "mark-to-market" basis, and their value under a more stressed economic scenario. The value of each bank's real estate holdings also will be assessed.

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