26.06.2012

By Simon Miller

Spain's borrowing costs are continuing to rise with its short term bills nearly tripling in cost at this morning's auction.

The country's 3-month treasury bills leapt to 2.4% from 0.8% previously with the bid-to-cover dropping to 2.6 compared with 3.9.

The 6-month treasury bill yield also jumped to 3.2% compared with 1.7% with demand also dropping to 2.8 versus 4.3 last time. 

The auction comes the day after Moody's downgraded 28 Spanish banks following its downgrading of the sovereign rating to Baa3 from A3.

The ratings agency said the downgrade not only reflected concern over the Spanish government's ability to support the country's banks but also the mounting risk of real estate losses. 

In the rating note, Moody's commented: "The banks’ exposures to commercial real estate will likely cause higher losses, which might increase the likelihood that these banks will require external support."

Bankia, which is already due to receive €23.5bn in state aid, was downgraded to junk by Moody's, while Banco Bilbao Vizcaya Argentaria (BBVA), Spain's second largest bank, was cut by three notches to just above junk.

Although Moody's warned that it could cut Spain's rating to "junk" within three months, following an assessment of the bank bail-out, it welcomed the government's efforts to "stabalise the banking system".

On Monday Spain formally requested financial assistance to recapitalise its banks. 

In a letter to the head of the eurogroup of eurozone finance ministers Jean-Claude Juncker, Spanish economy minister Luis de Guindos made a formal request “for financial help for the recapitalisation of Spanish financial institutions that may require it”. 

News agency reports suggest that the country is looking for up to €100bn (£80.6bn), although a figure of €62bn has been mooted. 

The letter aims to agree details and conditions of the loan before the next eurogroup meeting on 9 July.