Spanish debt costs spiral, rajoy says no outside bailout - Colored Cardboard Boxes

Government sources told Reuters Spain may recapitalize Bankia withsovereign paper in return for shares in the bank and could use thismethod to prop up other troubled lenders - moves which would pushthe country's debts above the 79.8 percent of economic output whichhad been expected this year. "This method has been used by Germany and by Ireland in the past,it is perfectly valid," a government source told Reuters. The source said the European Central Bank had been informed of theplans and did not object so far, though a final decision had notyet been made on which option to take. Bankia's parent company BFA has asked for 19 billion euros ($23.8billion) in government help, in addition to 4.5 billion the statehas already pumped in to cover possible losses on repossessedproperty, loans and investments. Investors increasingly believe weak banks, undermined by thecollapse four years ago of a decade-long property boom, coupledwith indebted regions, could force Spain to seek an internationalbailout, which the euro zone can barely afford.

LACK OF CONFIDENCE With stock markets generally buoyed on Monday by polls giving apro-bailout Greek party a slender lead ahead of June 17 elections,the fact that the premium investors require to hold Spanishgovernment bonds over German counterparts hit a euro-era high at505 basis points, denoted a distinct lack of confidence in Madrid'sefforts to stabilize its finances and ailing banks. Having dropped to around 4.7 percent earlier this year, helped bythe ECB's creation of a glut of three-year money, 10-year borrowingcosts are now approaching 6.5 percent and closing in on the 7percent level widely seen as unsustainable. Ireland and Portugal were frozen out of capital markets and forcedto seek international bailouts soon after their yields topped 7percent. "If it goes on for much longer, it just adds to the burden offiscal consolidation," said Elisabeth Afseth, analyst at Investecin London. "If a large part of that is spent on paying a premium toborrow, it just makes it so much harder." Spain's great advantage is that it has issued well over half thedebt it needs to this year, in the first five months.

But that may no longer hold true. The government said last week its highly indebted regions faced 36billion euros of debt refinancing bills this year, way above thepreviously stated 8 billion. Catalonia said it was running out ofoptions and needed central government help. A plan to recapitalize Bankia with Spanish government bonds, whichthe bank could then use as collateral to get cash from the ECB,could add to the government's refinancing problems.

Spain's Treasury insisted it would repay debt maturing withoutproblems. "We are in a very strong position (to meet debt maturing shortly),"said Ignacio Fernandez Palomero, deputy director of public debt atthe Treasury, pointing to redemptions in July and October, whenSpain has big amounts due. THUMBS DOWN FROM MARKETS Meanwhile, Bankia parent BFA is set to report on Monday the biggestloss in Spain's banking history. "The figures are much higher than any other release from any otherbank," a financial source with direct knowledge of the bank'ssituation told Reuters. Despite the 23.5 billion euros rescue cued up for Bankia, itsshares tumbled by about 12 percent, pressuring some weaker peers.

Its drastic hike in provisions to cover potential losses fromrepossessed property and souring consumer debt has raised theprospects that other banks may need to do the same. A wider audit of Spain's banking system should reveal by June whatcapital gap other banks will need to fill. "The events at Bankia will reinforce the view that the upcomingexternal review should identify a significant recapitalization needfor the Spanish banking system," analysts at Nomura said in a note,putting a recapitalization of the whole sector at between 50 and 60billion euros, with the main listed banks requiring an additional16 billion euros. Nomura said only BBVA, Santander and Sabadell would not need tostrengthen their capital, while the government would need to cleanup smaller lenders it has already propped up, such as Banco deValencia, Novacaixagalicia and Catalunya Caixa. "Given the current economic and political uncertainties facing theeuro zone, this could see additional pressure on Spain to considerusing external funds for the bank recapitalisation," Nomura said.

(Additional reporting by Jesus Aguado; Writing by Mike Peacock;Editing by Fiona Ortiz and David Holmes).

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