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Spain downgraded as bailout estimates mount | Spain downgraded as bailout estimates mount |
(about 1 hour later) | |
Spain's credit rating has been downgraded as estimates on the size of the bailout it needs begin to mount up. | Spain's credit rating has been downgraded as estimates on the size of the bailout it needs begin to mount up. |
Fitch cut its rating on Spanish government debt by three notches to "BBB", a sign it thinks Spain's ability to honour its debts has weakened. | Fitch cut its rating on Spanish government debt by three notches to "BBB", a sign it thinks Spain's ability to honour its debts has weakened. |
Earlier, there was strong demand for Spanish bonds at an auction on Thursday, seen as a key test of the country's ability to raise funds. | Earlier, there was strong demand for Spanish bonds at an auction on Thursday, seen as a key test of the country's ability to raise funds. |
However, it did have to pay a higher interest rate than before. | However, it did have to pay a higher interest rate than before. |
The rate on the 10-year Spanish bonds was 6.044%, up from the 5.743% from the last auction in April. | The rate on the 10-year Spanish bonds was 6.044%, up from the 5.743% from the last auction in April. |
Spain sold 2.1bn euros ($2.6bn; £1.7bn) in medium and long-term bonds. | Spain sold 2.1bn euros ($2.6bn; £1.7bn) in medium and long-term bonds. |
The result showed Spain was not locked out of credit markets, although its finance minister said on Tuesday that these were "effectively shut" to his country. | The result showed Spain was not locked out of credit markets, although its finance minister said on Tuesday that these were "effectively shut" to his country. |
The higher rate, though, is a sign of weakening confidence in Madrid's ability to repay its debts, a view underlined by the Fitch downgrade. | The higher rate, though, is a sign of weakening confidence in Madrid's ability to repay its debts, a view underlined by the Fitch downgrade. |
Shortfall | Shortfall |
Fitch put Spain's creditworthiness at BBB, two notches above junk in its ranking scheme. | Fitch put Spain's creditworthiness at BBB, two notches above junk in its ranking scheme. |
It also estimated the country's banks would need at least 60bn euros (£49bn, $75bn), or as much as 100bn euros. | It also estimated the country's banks would need at least 60bn euros (£49bn, $75bn), or as much as 100bn euros. |
An International Monetary Fund (IMF) report due out on Monday is expected to show Spanish banks need at least 40bn euros. | An International Monetary Fund (IMF) report due out on Monday is expected to show Spanish banks need at least 40bn euros. |
It is the first of a number of reports for which the Spanish government is waiting before it decides how to recapitalise its banks. | It is the first of a number of reports for which the Spanish government is waiting before it decides how to recapitalise its banks. |
Ratings agency Standard and Poor's earlier said Spain's financial system could absorb up to 60bn euros of losses on bad loans. | Ratings agency Standard and Poor's earlier said Spain's financial system could absorb up to 60bn euros of losses on bad loans. |
But if it needs to find 80-112bn euros, then the banks would need government or EU aid, it said. | But if it needs to find 80-112bn euros, then the banks would need government or EU aid, it said. |
Help | Help |
German Chancellor Angela Merkel, who held a meeting with UK Prime Minister David Cameron, said the EU stood ready to act. | German Chancellor Angela Merkel, who held a meeting with UK Prime Minister David Cameron, said the EU stood ready to act. |
But she has called for Europe to take a gradual path towards political union. | But she has called for Europe to take a gradual path towards political union. |
For his part, Mr Cameron urged immediate action,calling for measures to calm nervous markets. | For his part, Mr Cameron urged immediate action,calling for measures to calm nervous markets. |
European authorities are said to be working on a way to help Spain's troubled banking sector. | European authorities are said to be working on a way to help Spain's troubled banking sector. |
UK Chancellor George Osborne said: "I know they are working very hard on an imminent solution." | UK Chancellor George Osborne said: "I know they are working very hard on an imminent solution." |
"I am optimistic that people are working hard on a solution, and a solution, I think, is coming," he told the BBC. | "I am optimistic that people are working hard on a solution, and a solution, I think, is coming," he told the BBC. |
Borrowing costs had not been as high as feared due to these efforts in Brussels to try to find a way to help Spain, analysts suggested. | Borrowing costs had not been as high as feared due to these efforts in Brussels to try to find a way to help Spain, analysts suggested. |
Spain remains the focus of international concerns. In other developments: | Spain remains the focus of international concerns. In other developments: |
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In the Spanish bond auction, there was demand for 3.3 times as many 10-year bonds as were available on Thursday. | In the Spanish bond auction, there was demand for 3.3 times as many 10-year bonds as were available on Thursday. |
The yield on Spanish 10-year bonds from previous auctions, known as the secondary market, fell below 6.1% in trading on Thursday, having recently risen above 6.7%. | The yield on Spanish 10-year bonds from previous auctions, known as the secondary market, fell below 6.1% in trading on Thursday, having recently risen above 6.7%. |
"Although the yield on the 10-year is just a tad below secondary market levels, these are prohibitive rates which underscore the dramatic deterioration in Spain's perceived creditworthiness," said Nicholas Spiro of Spiro Sovereign Strategy. | "Although the yield on the 10-year is just a tad below secondary market levels, these are prohibitive rates which underscore the dramatic deterioration in Spain's perceived creditworthiness," said Nicholas Spiro of Spiro Sovereign Strategy. |
"If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt." | "If it wasn't for its banks' continued support at auctions, Spain would be unable to sell its debt." |
Spain is keen to avoid a full international bailout, which would be politically damaging and come with strict economic conditions. | Spain is keen to avoid a full international bailout, which would be politically damaging and come with strict economic conditions. |