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Spain close to being shut out of markets as its borrowing costs hit record high

SPAIN lurched closer to becoming the largest eurozone country yet to be shut out of credit markets when it had to pay a euro-era record price to sell short-term debt yesterday.

The soaring borrowing costs showed that a eurozone deal to lend Spain up to €100bn for its banks has not solved the country's problems or restored investor confidence and suggests more aid may be needed to fix its finances.

They also illustrated how Europe's troubles run much deeper than Greece, brought back from the brink of default by Sunday's parliamentary election that has cleared the way for a renegotiation of the terms of its bailout package.

The 30-month debt crisis has hobbled the global economy and world leaders meeting in Mexico piled pressure on the eurozone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.

"The decidedly elevated yield levels leave a question mark firmly in place as regards the sustainability of Spain's public finances while doing nothing to temper speculation as to how long the country might hold out before looking for a more comprehensive bailout," said Rabobank strategist Richard McGuire.

Spain, the eurozone's fourth largest economy, had to pay 5.07pc to sell 12-month Treasury bills and 5.11pc to sell 18-month paper -- an increase of about 200 basis points on the last auction for the same maturities a month ago. Yields on longer-term bonds are over 7pc.

The auction underscored the government's increasingly shrill pleas for help from the ECB, two days before Madrid tries to sell three-to-five year bonds.

The ECB believes it can have little lasting influence on market confidence unless eurozone political leaders take bold decisions to strengthen the 17-nation currency zone although the president, Mario Draghi, has hinted at a rate cut.

The central bank, the only federal institution with the capacity to act swiftly and decisively, is also split between hawks and doves, with German-led hardliners publicly opposing further purchases of government bonds of debt-stricken nations.

Germany, Europe's biggest economy and paymaster, has taken a tough line with countries in trouble during the crisis.

But its own economic outlook is darkening with the closely watched ZEW index of analyst and investor sentiment falling at its fastest rate since October 1998, before the euro was launched.

Speaking to reporters on the sidelines of the G20 summit, Spanish Economy Minister Luis de Guindos said Madrid's policies were not to blame for the loss of investor confidence.

"We think ... that the way markets are penalising Spain today does not reflect the efforts we have made or the growth potential of the economy," he said. "Spain is a solvent country and a country which has a capacity to grow."

Some market experts said the strong demand at yesterday's T-bill auction reflected expectations that Spain would be able to avoid a full state bailout of the kind international lenders have provided for Greece, Ireland and Portugal.

"It's in no one's interest to see Spain bailed out, because then there will be questions as to whether there are enough funds, and questions over Italy," said one market maker in Spanish bonds.

Others voiced doubt that Spain could avoid a sovereign rescue. (Reuters)

Irish Independent