The Spanish treasury this evening announced that it had cancelled a bond auction scheduled for August 18, as the country comes under escalating market pressure.
The statement came hours after the country had managed to raise €3.3 billion in an auction of short-term bonds, but at much higher interest rates than it previously paid.
On bond markets this evening, the yield or interest rate on Spanish 10-year bonds remained above 6.3%, close to levels that are seen as unsustainable in the long-term.
This morning, Spain appeared to have passed its latest bond market test. It sold €2.2 billion in three-year bonds. But the yield, or annual return offered to buyers, surged to 4.813% from 4.037% at the previous comparable auction June 2, the Bank of Spain said.
The state also sold €1.1 billion in four-year bonds for a yield that shot to 4.984% from the 2.862% offered at the previous comparable auction in October 2009.
Finance Minister Elena Salgado held a crisis meeting on the eve of the bond issue with Prime Minister Jose Luis Rodriguez Zapatero to grapple with the market turmoil that has targeted Spain and Italy's debt.
Afterwards, she said Spain's government had covered two-thirds of its financing needs for this year but said it was 'good to show again Spain's capacity to go to the markets'.
The high rates on offer lured investors, with requests for the bonds amounting to €7.4 billion, outstripping supply by more than two to one, the Bank of Spain said.
Barroso wants EU rescue fund re-think
The European Commission has called for a re-assessment of all elements of the euro zone's current and future bail-out funds, including their size, to convince markets the euro zone can respond to the debt crisis.
The call came in a letter from Commission President Jose Manuel Barroso to EU leaders. It urged a 'rapid reassessment' of the European Financial Stability Facility and the European Stability Mechanism, which is due to come into effect in 2013.
Mr Barroso urged leaders to make sure the EFSF and ESM were 'equipped with the means for dealing with contagious risk'.
A Commission spokeswoman clarified that the call for re-assessment included the size of the funds. Some analysts say the current €440 billion available to the EFSF may not be enough to cope with a bail-out for a bigger euro zone country such as Spain or Italy.
'Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery,' Barroso said.
He said the July 21 agreements reached by EU leaders, which give the EFSF more flexibility, were not having their intended effects on the markets.
He attributed market pressure on euro states to slow global growth and US debt problems as well as to 'first and foremost, the undisciplined communication and the complexity and incompleteness of the July 21 package'.
