Spain paid sharply higher borrowing rates today in a sale of €3.077 billion of short-term sovereign debt, the central bank said, a sign of high tension over its financial sector.
The borrowing rate on three month bills nearly tripled to 2.362% from 0.846% in the last comparable sale on May 22.
The rate on six-month bills rose to 3.237% from 1.737% on May 22.
The high rates attracted strong demand of €8.325 billion, the bank said in a statement, and Spain was able to borrow slightly more than the €2-3 billion it had planned.
Tension on the financial markets that lend to Spain has soared in recent weeks because of concerns over its banking sector, severely weakened by the collapse of a housing boom in 2008.
Spain yesterday formally requested a rescue loan from a credit line of up to €100 billion offered by its euro zone partners to secure the banks. It did not say publicly how much of this amount it would borrow. Independent consultants last week said Spanish banks could need up to €62 billion to survive.
After the announcement, Moody's credit agency hit 28 Spanish banks with new credit downgrades, leaving three-quarters of the industry in junk-bond status.
Moody's cited the banks' exposure to bad property loans and the lowering of Spain's overall sovereign rating, which it cut less than two weeks ago by three notches to Baa3 - just one notch above junk-bond status. Spanish banks slumped on the Madrid stock exchange this morning after the downgrade.
Spain's lower creditworthiness "not only affects the government's ability to support the banks, but also weighs on banks' stand-alone credit profiles", the agency said.
Moody's said, however, that it "views positively the broad-based support measures being introduced by the Spanish government to support the Spanish banking system as a whole".
Consultants hired by Madrid have estimated that the banks - hobbled by huge, reckless loans that turned sour after a property bubble imploded in 2008 - need up to €62 billion in capital. Euro zone finance ministers have offered up to €100 billion for the country's lenders.
A full-blown bailout for Spain, the fourth-largest economy in the euro zone, would dwarf the rescues of Ireland, Greece and Portugal and strain the resources of the bloc to the limit. Spain's banking distress will be the focus of a meeting of euro zone finance ministers on July 9.
When they meet on Thursday and Friday, EU leaders will consider deepening economic and monetary union to finally overcome the debt crisis that has wracked the euro zone for two years.
European leaders also face demands from Greece's new three-party coalition government for different terms for its bailout, including a two-year deadline extension on reforms. But German Chancellor Angela Merkel's spokesman Steffen Seibert warned that no decision would be taken until an international team of auditors had assessed the state of Greece's economy.
A team from the European Union, IMF and European Central Bank postponed a visit to Greece originally set to begin Monday due to the health problems of Greek leaders. No new date has been set.
However, adding to the uncertainty around Greece was news that the bank chairman who was to become finance minister in a new government turned down the job on Monday owing to what a spokesman said was a "chronic" condition.
That came as Prime Minister Antonis Samaras was released from hospital, two days after surgery for a detached retina, although he has been told to stay at home for at least a week to recover.
US President Barack Obama, wishing Samaras a speedy recovery, urged him to work closely with European leaders and world finance bodies to push forward his country's reform programme.
Italy pays higher rates in €3.9 billion bond auction
Italy had to pay investors higher rates of return at a bond auction this morning, reflecting increasing unease over risk of contagion and scepticism over whether an upcoming EU summit can stem the debt crisis.
The government sold a total of €3.9 billion worth of bonds, including €2.99 billion in zero coupon notes due to ma