Spain borrowing rates rise, bank shares slide

Brokers looks at the main display at the Stock Exchange in Madrid, Wednesday, May 16, 2012. Spain's Prime Minister warned that the country faced the real danger of being locked out of international markets as investors continued to fret about the future of the euro. At one stage, the difference between the interest rates demanded by investors for Spanish and German 10-year bonds shot past the 500 basis point level, prompting Mariano Rajoy's warning over the country's ability to continue funding itself. (AP Photo/Daniel Ochoa de Olza)

MADRID (AP) — Spain paid sharply higher interest rates in a debt auction on Thursday, reflecting concerns the country will be caught up in the fallout of the Greek crisis, as a recently nationalized Spanish bank's shares plummeted after a newspaper said depositors were rushing to withdraw money.

Investors worry that a messy Greek exit from the currency bloc could destabilize Spain's financial sector. The concern is that the banking sector might not be able to meet tough new provisioning requirements and require bailouts if concerns about their stability worsen.

The government, meanwhile, risks needing a bailout itself if it needs to rescue the banks. It is already struggling to meet deficit-reduction targets during a painful recession, with austerity measures draining money from the economy.

Prime Minister Mariano Rajoy warned this week that the country risked being frozen out of capital markets because of the sky-high interest rates, or yields, it would have to pay to maintain its debt.

The Treasury on Thursday sold three kinds of bonds, two maturing in 2015 and one in 2016, for a total of €2.5 billion ($3.18 billion). For the three-year note, the only one which was comparable to previous sales, Spain's borrowing rate — or yield — rose to 4.87 percent, from 4.04 percent in a similar auction on May 3.

On the secondary market, where issued bonds are traded freely, the interest rate on Spanish 10-year bonds stood at a worryingly high 6.32 percent. It has risen sharply from below 5 percent in March and is edging toward the 7 percent mark that is considered unsustainable in the longer term. Greece, Ireland and Portugal sought bailouts when their 10-year bond yields remained stuck above that level.

The spread, or difference, between Spain's 10-year debt yield and that of the safe-haven German bunds was 4.89 percentage points. Investor appetite in the auction was nevertheless strong, with demand covering the amount on offer between 2 and 4.5 times.

Tensions remained high in the markets, where shares in Bankia SA, a bank nationalized last week, plunged as much as 27 percent on a newspaper report that customers have withdrawn more than €1 billion ($1.27 billion) since the state took it over. By midafternoon in Madrid, the shares had recovered somewhat to trade 10 percent lower at €1.49.

Bankia, the country's fourth-largest lender, appealed for calm and told depositors their money was safe, while the government denied there was a run on the bank.

"It is not true that at this time a flight of deposits from Bankia is taking place," said Fernando Jimenez Latorre, the deputy economy minister, adding that the bank was big and "has enormous strength."

Araceli Mora, Bankia's chief risk officer, did not comment on the report but she sought to reassure depositors, noting that the state's control of Bankia "is a source of calm in terms of the stability of the bank."

Still, since Bankia was created last July as the listed result of a merger of seven regional savings banks its share price has dropped nearly 70 percent. Its market capitalization is now lower than that of smaller Spanish banks.

The drop in Bankia's shares helped push the broader Ibex 35 stock index down about 1.5 percent on Thursday. Other banks also saw their share price fall with Banco Santander SA down 3 percent.

The newspaper El Mundo reported it had obtained access to data presented at a Bankia board meeting Wednesday which said depositors had withdrawn €1 billion since last Wednesday, the day the nationalization was announced. The bank is heavily exposed to the country's collapsed property market, with €32 billion in assets deemed problematic.