(Money Watch) Spain, faced with rising interest rates, is backing off its pledge to not to seek emergency foreign aid to help rescue its banks. This move is likely to drive rates up even further as investors, already nervous about the nation's debt load, confront the specter of an international bailout.
The latest development in this crisis hit Friday when Prime Minister Mario Rajoy's administration was rocked by two huge demands for financial aid. First Bankia, the nation's fourth largest bank, said it would need a $24 billion bailout. This was followed by the news that Catalonia, Spain's most prosperous region, could not afford to borrow money and also needed support from the national government. The region represents about one fifth of the Spanish economy and has more than $16.46 billion in debt to refinance this year.
Over the weekend Rajoy said the nation would fund the rescue of Bankia, the nation's collapsed 4th largest bank, on its own. This extremely unusual plan would have Madrid issuing Spanish-government-guaranteed debt to Bankia in return for equity, with the bank then able to deposit the bonds with European Central Bank as collateral for cash. Today an economy ministry spokesman said that was now a "marginal" option for the rescue.
To deal with Catalonia, the government today announced it would approve the issuing of joint bonds by regional governments to make it easier for them to raise money. The hope is that the creation of so-called "hispanobonos," to be guaranteed by the state, will help reduce financing costs for Spain's 17 autonomous communities, which now vary sharply. Because Spain's overall condition is so bad - it is in a recession, has an unemployment rate over 23 percent and at their fastest pace on record - joint bonds may not fare much better with investors.
So far investors seem confused by these new developments. While Spain's 10-year bond rates were down slightly today, both the 2-year and 5-year rates were up. Yesterday the 10-year bond yields climbed to 6.47 percent, the highest in 2012, but today they inched off that to close at 6.45. The 5-year opened today at 5.73 and closed up 1.6 percent at 5.83. Likewise, the 2-year opened at 4.56 and closed up at 4.62, a 3.6 percent increase.