Market pressure on Spain eases amid hopes for help

(AP) MADRID - Spain's borrowing costs edged lower Wednesday on hopes that the European Union may be moving closer toward adopting measures that could alleviate the country's financial crisis.

The interest rate - or yield - that Spain would have to pay on its 10-year bonds was at 6.22 percent in midday trading, nine basis points below it closing figure Tuesday, according to financial data provider FactSet. The spread, or difference, with the equivalent safe-haven German yield fell below 5 percentage points for the first time in more than a week.

The drop in yields comes a day after the most explicit suggestion from the Spanish government that it is seeking help from Europe for its struggling banks as a finance minister said that the country risks losing access to the financial markets.

Desperate Spain seeks international aid for banks
Spanish pull money from banks at record pace

Finance Minister Cristobal Montoro warned Tuesday that the high risk premium of recent week indicated "the door to the markets is not open for Spain."

Meanwhile, Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unity - a step that might allow its troubled banks to get direct financial help. The call comes although Spain insists it doesn't need outside aid.

European leaders are to hold a summit at the end of June to lo at ways to stop the 17-country eurozone from collapsing. The European Commission and the European Central Bank are expected to present measures at the meeting for creating a "banking union" that would oversee banks and possibly offer bailouts directly, bypassing national governments.

Spain has been the focus of investor concern that the country would soon need to seek an international bailout if its public finances become overwhelmed by the cost of rescuing its banks, which are sitting on massive amounts of soured property investments following the bursting of a real estate bubble

At the end of May, Spain's most stricken lender, Bankia S.A., said it needed 19 billion euro ($23.62 billion) in government aid to shore up its finances against losses on its toxic home loans. But Spain only has 5 billion euro left in a 19 billion euro fund that it established in 2009 to help banks. The government has promised to help Bankia but has not mapped out a plan.

These concerns have sent the yield on Spanish debt to dangerously high levels and close to the crucial 7 percent ceiling - a point at which other eurozone countries such as Greece, Ireland and Portugal sought a bailout. The country has become the focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would stretch the region's finances to breaking point.

Spain is eager for its banks being able to seek help on their own because if the government were to ask for it from the EU bailout fund, it would essentially constitute the beginning of a bailout. This international assistance would come with strings attached - its fellow countries in the 17-nation eurozone and the International Monetary Fund could impose certain policies on the Spanish government, something the country is keen to avoid.

But Germany appeared to pour cold water over Spain's maneuvers with Volker Kauder, parliamentary leader of German Chancellor Angela Merkel's conservative bloc, telling ARD television Wednesday that the Spanish government must tap the eurozone rescue fund to help its troubled banking sector because the money cannot go straight to a Spanish bank rescue fund. Kauder said there is discussion over whether aid could go directly to a Spanish bank rescue fund - but "I don't see this possibility."

He said the rules of the European Financial Stability Facility allow only for a country to apply.

The Spanish government has said that the amount of money needed to prop up its troubled banking sector is not excessively high and would be easily manageable under a system of greater Europe banking unity. Estimates have put the cost of a complete bailout for the Spanish banking sector between 40 billion euro and 100 billion euro.

Economy Minister Luis de Guindos said Wednesday the International Monetary Fund report on Spain's banks is due June 11 while two international auditing firms contracted to study the sector's health will report at the end of June.