Spain's Treasury on Thursday sold 2.2 billion euros ($2.77 billion) worth of debt maturing between 2014 and 2017, or more than initially planned, although the interest rates it was forced to pay were sharply higher and climbed above 6 percent in the case of the five-year bond.
After the auction, Spain's risk premium, the extra return investors demand on the country's 10-year bond compared to equivalent safe-haven German debt, fell below 500 basis points - down to 498 - for the first time since June 12.
The Treasury sold 699.5 million euros worth of two-year notes at an average interest rate of 4.7 percent, more than double the rate of 2.1 percent at a previous auction in March.
It sold 917.6 million euros in three-year bonds at an average rate of 5.46 percent, up from 4.3 percent at the previous auction, and 602.2 million euros in five-year notes at an average interest rate of 6.1 percent, the highest level since 1996.
Thursday's auction, in which the amount sold surpassed the initial target of between 1 billion euros and 2 billion euros, was the second held by Spain's Treasury this week.
Another bond auction on Tuesday was held a day after Spain's risk premium briefly soared to a euro-era record of 588 basis points.
This week's auctions also came less than two weeks after euro zone finance ministers agreed to extend a 100 billion euro ($125.6 billion) loan to Spain to help it shore up its ailing financial sector.
On Thursday, the results of two separate audits of Spanish banks carried out by the consulting firms Roland Berger and Oliver Wyman showed that bad loan-saddled lenders will require between 51 billion euros and 62 billion euros in additional capital under a worst-case scenario in which Spain's cumulative gross domestic product were to fall by 6.5 percent through 2014.
Under that scenario, housing prices would plunge 60 percent from their peak.
According to the deputy governor of Spain's central bank, Fernando Restoy, the consulting firms found that the funding needs will be concentrated at banks that have already received assistance from the state-backed Fund for Orderly Bank Restructuring, including BFA-Bankia, CatalunyaCaixa, Novagalicia and Banco de Valencia.
The country's largest banks, Banco Santander, BBVA and CaixaBank would not need additional capital even under the worst-case scenario, while a third group comprising seven financial institutions could raise the money by their own means or with some type of moderate state assistance.
Restoy, said that, based on the firms' audits, the European lifeline would be more than sufficient to stabilize Spain's most troubled banks.
Spain will formalize its bank-rescue request "in the coming days," Economy Minister Luis de Guindos said Thursday at a Eurogroup meeting in Luxembourg.
Separately, the Spanish government ruled out the possibility of asking its euro zone partners to use a regional bailout fund to make direct sovereign debt purchases.
"We're not going to bring that up today at all," De Guindos told reporters Thursday upon his arrival at the meeting.
The Spain-related issues at the meeting will center on financial aid for bank recapitalization, presentation of the private-sector audit results and determination of the next steps in this process, he said.
On Tuesday, British media reported that a plan was in place to purchase 750 billion euros worth of Spanish and Italian debt via the euro-area bailout fund to calm markets.
The European Commission later denied the reports and German Chancellor Angela Merkel said that possibility was not being discussed.
Spain's banks have been hard hit by the collapse of the country's 1995-2007 real estate boom, which has left them saddled with toxic property assets.
Recently nationalized BFA-Bankia - the country's No. 4 financial institution - is seeking what would be the largest bank bailout in Spanish history after saying on May 25 it needs another 19 billion euros to boost loss provisions.
The 2008 global financial meltdown came as Spain was struggling with the bursting of the property bubble. The ensuing slump has led to numerous business failures and pushed the country's jobless rate above 24 percent.
Nearly half of Spaniards under 25 are jobless and tens of thousands of families have been evicted from their homes after falling behind on their mortgages. EFE