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Spain under pressure to seek aid

Wednesday, September 19, 2012    

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MADRID, Spain - The amount of bad debt in Spain's banks rose to a record in July, according to data released yesterday, as the country came under further pressure to take up the European Central Bank's offer to help governments struggling with too much debt by buying unlimited amounts of bonds.

The Bank of Spain bank reported that the country's banks in July had (euro) 170 billion ($20 trillion) in loans that are at risk of not being paid, representing 9.86 per cent of their total loans. The bank said that the proportion of non-performing loans in July was up from 9.42 per cent in June.

Many of Spain's banks are loaded with soured real estate investments following the collapse of the country's property market in 2008. The 16 other countries that use the euro last month agreed to provide Spain with up to (euro) 100 billion to help support these banks. Results of a complete stress test of the sector are due to be made known September 28.

Spain has been under pressure to seek further help as it attempts to contain problems in the financial sector. The fortunes of the country and its banks are perilously linked --the country's financial sector is the main buyer of government debt and money from the sale of these bonds are used to prop up the banking industry.

On top of this, several of Spain's semi-autonomous regions have been unable to raise money themselves on the debt markets and have turned to the central government for a bailout.

The recession-hit country's borrowing costs have fallen from unsustainable highs in recent months after it said it may apply for international aid -- if the conditions are reasonable - and after the European Central Bank said it would buy unlimited amounts of short-term government bonds to help countries like Spain. Buying up short-dated debt should help lower a country's overall borrowing costs.

The rate for Spain's benchmark 10-year bonds on the secondary market dropped from over 7.5 per cent in July to 5.5 per cent last week, signaling a big increase in investor confidence that Spain would be helped by the ECB plan.

But the 10-year rate has since edged back up towards six per cent this week amid investor concern that Prime Minister Mariano Rajoy is needlessly delaying a decision on demanding a bailout.

Also Tuesday, Spain raised (euro) 4.5 billion in short-term debt auctions at sharply lower interest rates. The Treasury said it sold (euro) 3.5 billion in 12-month bills at an average interest rate of 2.84 per cent, down from 3.07 per cent in the last such auction August 21. It sold (euro) 1.01 million in 18-month bills at a yield of 3.07 per cent, down from 3.35 per cent.

Demand was more than double the amount offered in the 12-month bills and more than three times for the 18-month bills.

Spain's Treasury will test investor confidence again Thursday when it plans to sell up to (euro) 4.5 billion in three- and 10-year bonds.

The economic crisis has left Spain in double-dip recession with near 25 per cent unemployment. Austerity measures and reforms aimed at reining in the country's debt have triggered street protests and have raised some regional tensions.

Yesterday, in remarks seen as referring to a massive independence rally in the powerful northeastern region of Catalonia last week, King Juan Carlos called on Spaniards to remain united to combat the crisis.

The king said that these were decisive moments for Spain and Europe and that "chasing chimeras" and "inciting dissension" was the worst way out.

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