Spain is likely to pay record prices to borrow at debt auctions on Tuesday and Thursday after the Greek election failed to ease concerns about the future of the euro zone and amid uncertainty over whether Madrid will need a full sovereign bailout.
The yield on Spanish 10-year bonds hit a fresh high of above 7 percent on Monday as initial relief over the victory of pro-bailout parties in Greece gave way to ongoing fears of deeper problems facing the bloc.
Seven percent is considered too pricey for a country to afford over the long term. Such levels have previously led to bailouts in Greece, Ireland and Portugal.
Treasury Minister Cristobal Montoro told the Senate during a budget hearing on Monday that the European Central Bank should step in to fight market pressure, essentially a call for the bank to buy Spanish debt again, something it is very reluctant to do.
Spain's Treasury will issue between 2 billion and 3 billion euros ($2.52 billion-$3.79 billion) of 12- and 18-month debt on Tuesday, followed by between 1 billion and 2 billion euros of bonds due in 2014, 2015 and 2017 on Thursday.
Monday's market response to the Greek election - in which parties committed to the conditions of a European Union/International Monetary Fund bailout won by a narrow margin - suggest the prognosis is not good.
“It looks as though the market's broken now. I don't think there's anything the Spanish can do to bring it back. I don't think the ECB can bring it back... (a full sovereign bailout for Spain) is inevitable,” said Harvinder Sian, a rate strategist at London-based RBS.
“With the (G20) summit not looking like it will produce anything particularly dramatic to help in the crisis situation, I think the market's made its statement. There has to be a change in the way the Europeans are attacking the crisis.”
As options for the government to raise debt at an affordable price run out, Madrid is studying issuing some 6 billion euros via the state-held cash cow, the lottery company, Expansion reported on Tuesday, citing sources.
European leaders agreed on Monday to move towards a more integrated banking system to stem the debt crisis during a meeting of world heads in Mexico for a G20 summit.
Spain, the euro zone's fourth-largest economy and more than twice the size of bailed-out euro zone partners Greece, Portugal and Ireland combined, is at the centre of market jitters as it struggles with a deep recession and banking sector restructure.
The 12-month bill was trading on Monday in the secondary market, considered a good guide of primary auction yields, at around 4.9 percent.
Last month, the 12-month auctioned at 2.985 percent.
Thursday may be a bigger test, when Spain auctions bonds maturing April 30, 2014, July 30, 2015 and July 30, 2017.
On Monday, the 2014 bond was trading at around 5.5 percent compared with 2.069 percent at its last primary auction on March 1. The 2015 bond was trading above 6 percent after 4.876 percent on May 17 and the 2017 was trading at 6.7 percent, compared with 4.96 percent on May 3.
Spain's economy is under heavy pressure.
It entered its second recession since 2009 in the first quarter, and while it has barely grown at all since the property bubble burst in early 2009, most economists expect the economy to continue to shrink into next year at least.
Unemployment is over 24 percent, more than half all young Spaniards are out of work and deep spending cuts to tame one of the euro zone's largest public deficits are expected to prolong the downturn as investment plummets. - Reuters