19.06.2012

By Simon Miller

Spain's debt costs nearly doubled today as fears grow that it will need a bailout.

The country sold €2.4bn (£1.9bn) of 12-month Treasury bills at a yield of 5.074% compared with 2.985% on last month's €2.19bn auction and a bid to cover of 2.2 compared with 1.8 previously.

Spain also sold €640m of 18-month debt at a yield of 5.107 with a bid to cover of 4.4. The previous auction saw €710m sold at a yield of 3.302% and a bid-to-cover of 3.2.

The auctions of T-bills and bonds are being closely watched as the market shuts on Spanish sovereign debt. Yesterday, Spain's 10-year bond hit 7% on the secondary market, the benchmark which saw Ireland, Portugal and Greece head for a bailout.

The 10-year bond is currently trading at 7.092 slightly down from the morning's opening of 7.173.

The government plans to sell more medium-term bonds on Thursday to finance the budget deficit and repay maturing debt.

The rise in costs reflect growing concerns over the state of Spanish banks, hit by the collapse of the housing bubble.

A stress test report by consultants Oliver Wyman and Roland Berger is to be released later this week while a detailed audit of Spanish banks' loan books has been delayed until September rather than finished by 31 July.

Spain's central bank announced on Monday that bad debts held by the country's banks rose to a new 18-year high in April, indicating more companies and individuals are failing to make payments on time. The amount stood at €152.7bn, or 8.72% of the loans held by Spanish banks up from 8.37% in March.

Earlier, Moody's credit outlook warned that Spanish banks' issuance of more than €16bn of covered bonds to meet requirements for ECB funding had created a credit negative by diminishing the over-collateralisation enjoyed by covered bondholders as it dilutes their protection.