MADRID, June 21 — Spain's borrowing costs will probably hit a new euro era high at a debt auction today, a few hours before it sheds light on the dire state of its weaker banks and possibly makes a formal request for European Union funds to rescue them.
Madrid should show that it can still borrow on financial markets at the sale of short and medium-term bonds. However, the amount raised will be modest and the price punishingly high as international investors steer clear of Spain, leaving the often troubled domestic banks to buy up the bonds.
Spain faces a hectic day today as the latest euro zone country in the firing line following Greece, Ireland and Portugal which have already taken sovereign bailouts.
In the morning the Treasury aims to borrow up to two billion euros (RM8 billion) and in the afternoon the government will release an independent audit of the banks, which have been hammered by the effects of a property crash and a recession.
Then in the evening, Spain could make the formal request for up to 100 billion euros in aid for its weaker banks at a Luxembourg meeting of euro zone finance ministers, who already approved the plan informally earlier this month.
A lack of information on the bank rescue has helped to drive yields on Spanish government debt in recent weeks to levels at which the other struggling euro zone countries had to seek full sovereign bailouts, rather than just aid to recapitalise banks.
“The lack of details right now only serves to damage the situation. I say that as soon as we have the details of the audit, then we should ask for the plan to be enacted,” said a senior EU diplomat.
Yields on the secondary bond market indicate that the Treasury's borrowing costs on five-year debt at today’s auction will be the highest since 1996, three years before Spain joined the euro. It will also sell two shorter-dated bonds.
Even a reduced target of one to two billion euros may prove hard to meet, with the international investors shunning the bonds as they fear the government will be forced to take outside aid to back its own finances.
The auction will be followed by the results of the external audit of the banking system. Banking sources believe this will say the lenders need to raise a further 60 - 70 billion euros to improve their capital position.
Spain could use the audit results to request the bank aid quickly, according to several sources who said details would then be hammered out afterwards.
Two EU officials also said they expected the aid request to be made today or tomorrow. A Spanish government source said a final decision had not yet been made but an announcement could be made in Luxembourg.
The audit conducted by consultancies Oliver Wyman and Roland Berger is likely to divide the banks into three groups: the weakest regional savings banks heavily exposed to over-valued real estate assets, a group of mid-size banks which could face temporary liquidity problems and two 'good' banks – BBVA and Santander – that won't need any help.
This exercise, which tested the banks' ability to handle trouble in the overall economy, will be followed by a more detailed review of the banking system due by July 31.