Eurozone ministers meet to discuss Spain and Greece
(about 2 hours later)
Spanish bond yields hit a 16-year high on Thursday amid calls for eurozone ministers gathering in Luxembourg to back plans to reduce government borrowing costs.
Eurozone finance ministers are meeting to discuss a bailout for Spain's banks, and the future of Greece's two rescue packages.
The ministers have already agreed to give indebted Spanish banks up to 100bn euros ($126bn; £81bn) of aid, but Madrid has to make a formal request.
The Spanish government said it would do this "in the coming days" after an audit of the banks.
Meanwhile, Greece has confirmed it wants to renegotiate its bailout terms.
Speaking to reporters as he arrived for the meeting in Luxembourg, Spain's Economy Minister Luis De Guindos said: "We have already started working on the design of the aid [for Spanish banks] with the Commission, the European Central Bank, and the International Monetary Fund."
Greece 'jeopardy'
Although Greece's new coalition government had already pledged to renegotiate its two bailout deals, the formal statement was made by Greece's new Prime Minister Antonis Samaras.
He said the government wished to "revise the terms of the loan agreement without jeopardising the country's European course or its presence in the euro".
Greece would like to extend the term of the loans it is continuing to receive from the European Union and International Monetary Fund.
This would reduce the country's monthly payments and give economic reforms such as the lower minimum wage and more liberal work practices more time to generate the economic growth necessary to repay the country's huge debts.
France's Finance Minister Pierre Moscovici said: "We know that it means that Greece will have to respect its commitments.
"But it also means that Europe has to be sensitive to the feelings of the Greek people, and take measures in order to help the country achieve growth.
"Efforts must be made, but at the same time we have to create conditions for hope. That's what the euro must be about."
However, despite Mr Moscovici's warm words, most analysts say that Germany - the eurozone's biggest economy and largest individual financial contributor to the rescue funds - is yet to be convinced.
Borrowing costs
The result of the first independent audit of Spain's troubled banks is due to be released later.
It comes as Spain's cost of borrowing - the yields on government bonds - hit a 16-year high.
Madrid sold 2.2bn euros (£1.7bn) of bonds repayable over two, three and five years.
Madrid sold 2.2bn euros (£1.7bn) of bonds repayable over two, three and five years.
It paid a yield of 6.07% on five year bonds, up from 4.96% in May.
It paid a yield of 6.07% on five year bonds, up from 4.96% in May.
Seperately, the results of an audit into the funding needs of Spanish banks is due to be published later.
The finance ministers are also facing increased calls to act to reduce the cost of government borrowing across the eurozone, by using the region's two main bailout funds, the European Financial Stability Facility (EFSF), and the new European Stability Mechanism (ESM) fund, to buy up sovereign bonds on the open market.
Spain has raised 61% of the money it needs to fund government spending and debt repayments this year.
Most of Spain's debt was amassed during times of much lower lending rates and is not due to be repaid for several years, so the country's average cost of borrowing remains at a relatively low 4%.
Demand for Spanish debt also rose slightly from last month suggesting investors have not lost faith in Spain's ability to meet its financial obligations.
"Spain can withstand a rise in borrowing costs for a temporary period," said Sarah Hewin, head of european research at Standard Chartered.
However yields on the secondary debt markets, where investors can buy and sell Spanish bonds sold at previous government auctions, have hit much higher levels.
On Monday, the yield on benchmark ten-year debt hit a record high of 7.3% on the secondary market. Italy and Portugal were forced to seek bailouts when their borrowing costs exceeded 7%.
Eurozone bailout talks
Later on Thursday, independent auditors will detail the size of debts held by Spanish banks relating to risky lending to homebuyers and property developers.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms: AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
That is expected to prompt a formal request by Madrid for eurozone money at the meeting of ministers. European leaders have already approved up to 100bn euros of loans from European bailout funds for this purpose.
Cyprus faces similar problems with highly indebted banks and is expected to ask for approximately 10bn euros.
Greece debt renegotiation
Greece is also expected to ask eurozone finance ministers to ease conditions on its bailout.
The country's new finance minister Vassilis Rapanos faces a difficult task. The ruling coalition's mandate to make further spending cuts is very weak following two divisive elections in a matter of weeks.
But, according to the head of the Euro Working Group, Thomas Wieser, the faster-than-expected fall in national wealth now makes it impossible for Greece to meet the conditions of its bailout without making deeper cuts.
He said that eurozone ministers face a stark choice of either sticking to the fiscal targets and needing additional cuts, or changing the deadlines and needing extra money.
Extending the term of Greece's loans would reduce the country's monthly payments and give economic reforms such as the lower minimum wage and more liberal work practices more time to generate the economic growth necessary to repay the country's huge debts.
Bond-buying scheme
There has been mounting speculation that the eurozone might try to help countries under pressure in the financial markets, such as Italy and Spain, by using the bailout agencies to buy up their debts.
The Italian leader Mario Monti has suggested it. The German Chancellor Angela Merkel has not rejected it but she has described it as a purely theoretical idea; it is not under discussion she said. Finland opposes it.
The biggest question of all is whether the eurozone can move towards more integrated government finances and bank regulation.
They are politically difficult, but that is what many observers think it would take to stabilise the eurozone.
Finance ministers meeting in Luxembourg can't resolve those issues. Leaders will wrestle with them next week.
There is also mounting pressure on eurozone leaders to intervene to bring down government borrowing costs.
The constitutions of the European Union's existing bailout fund, the European Financial Stability Facility (EFSF), and the new European Stability Mechanism (ESM) fund, which is due to come into force next month, allow both to lend money to governments.
In an interview with the Financial Times, Benoit Coere, a senior policy maker of the European Central Bank said: "Certainly it's a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility."
Providing a cheaper alternative to commercial bond markets would reduce the cost of financing government borrowing and enable countries such as Spain and Italy to meet strict targets on reducing total national debt.
In the longer term, eurozone leaders are moving towards a system of more integrated government finances and bank regulation which could prevent future sovereign debt or banking crises.
But, at this week's meeting of leaders from the world's 20 biggest economies, there seemed to be consensus that eurozone politicians will have to put in place interim measures such as a bond-buying scheme soon to prevent the current crisis from deepening.
