MADRID - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, reflecting a growing belief that the country will need a full sovereign bailout that the euro zone can barely afford. Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not payable indefinitely. Italy, commonly regarded as too big to bail out, has been dragged along in its wake. The Spanish Treasury sold the three billion euros of 3- and 6-month bills it was aiming to although yields climbed with the six-month paper jumping to 3.691 percent from 3.237 percent last month. "The most important takeaway from this auction is that Spain was able get all its debt out the door," said Nicholas Spiro of Spiro Sovereign Strategies. "Still, in March, Spain was able to issue six-month debt at a yield of under 1 percent, now it is paying 3.7 percent." Spain had cushioned itself by securing well over half its annual debt needs in the first six months of the year when market conditions were more benign but that advantage has evaporated. On Friday, the government said it expected the economy to remain in recession well into next year while the autonomous region of Valencia became the first to ask Madrid for aid to pay debt obligations it cannot meet. Others are expected to follow. Spain's north-eastern region of Catalonia, responsible for a fifth of the country's output, said on Tuesday it was studying a government plan to help it meet a heavy funding schedule but will not decide whether to sign up until later this year. On the secondary market, Spanish five-year government bond yields rose above 10-year yields for the first time since June 2001. Having to pay more to borrow shorter-term rather than longer-term is usually a sign that markets think the risk of a default or debt restructuring has increased. "The spread between 5- and 10-years moved to negative today,which is a classic sign that the market thinks the current trends are unsustainable for Spain's fiscal dynamics," said Nick Stamenkovic, bond strategist at RIA Capital Markets. The premium investors demand to hold Spanish 10-year bonds is now at its highest level since the birth of the monetary union, at 7.6 percent, while the cost of insuring Spanish debt against default has also hit record highs. Ten-year yields of over 7 percent have proved to be a tipping point which eventually led to bailouts elsewhere in theeuro zone, though de Guindos insisted on Monday Madrid would not need more aid. Madrid has already asked for up to 100 billion euros to recapitalise its banks which have been battered by a four year economic downturn and a burst property bubble. The government has launched a fresh 65 billion euros package of tax rises and spending cuts designed to chip away at its debt mountain but which will probably drive the economy deeper into recession.
