Spain's cost of borrowing will probably rise at bond sales next week, economy minister Elena Salgado acknowledged today, adding that the government would take further steps if necessary to meet its budget targets.
Madrid has rushed in a series of new proposals to strengthen its finances over the past 10 days, seeking to rebuild investor confidence. But the Spanish yield premium that investors demand over German bunds, Europe's debt benchmark, has remained stubbornly high and jumped again today to 245 basis points.
Spain's financing costs have soared since October as investors fear other highly indebted and fragile economies in the euro zone will end up needing rescue packages similar to those of Greece and Ireland.
Ms Salgado told national radio station Onda Cero that the increase to Spain's borrowing costs was a temporary phenomenon and that yields of more than 5 per cent on Spanish government debt were not "alarming".
Madrid has two more auctions planned this year and will sell both 10- and 15-year bonds on December 16th. Its 10-year bonds currently trade at yields of around 5.37 per cent on the secondary market, while 15-year yields are around 5.9 per cent.
"We are paying an average interest rate of 3.6 per cent and it is possible that ... we might have to pay 5 per cent. But it would only be on those issues that we do at this moment," Ms Salgado said.
"It's true that we might have to pay a little more for bond issues than we have in the past. For that reason we have said we will reduce the volume until the markets stabilise."
Investment bank UBS said investor concerns about Spanish government debt and the banking sector had abated but not disappeared. Worries "may persist until larger provisioning buffers and stronger capital are rebuilt in the financial sector", UBS said in a research note.
Shares in the euro zone's largest bank Santander and BBVA were 2.4 and 1.7 per cent lower, while Spain's smaller banks also lost ground during the morning.
Spain has responded to the latest phase in the euro zone crisis by bringing forward plans to partially privatise state assets including the national lottery while increasing taxes and cutting benefits.
Ms Salgado said Spain would stick to its budget target come what may, saying this was "unconditional".
Spain and Portugal have moved into the eye of the storm since Ireland was forced into an €85 billion aid deal, with bond yields rising steadily for both.
A bailout for both Lisbon and Madrid would likely stretch the current funds the EU has put aside to deal with the crisis but Ms Salgado insisted that an Irish-style rescue package for Spain had never been contemplated.
Reuters