Worries about Spain's ability to repay its debt grew last week when the country agreed to accept a eurozone loan of up to â¿¬100 billion to shore up its ailing banks, which are sitting on massive amounts of soured real estate investments.
The big fear is that, as the money will count as a loan and raise Spain's overall debt load, the country's financing costs will suffocate the government as it tries to wade its way through a recession and a 24.4 percent jobless rate.
Because the government is ultimately responsible for repaying the banks' bailout money, the deal has increased fears about the size of public debt. If the government cannot get the bailout money back from the banks, it will be saddled with the losses.
Those losses could prove too much to handle for the government, struggling with grim economic prospects and the jobless rate that is the highest among the 17 nations that use the euro.The high borrowing costs that Spain has to pay to get investors to buy up its debt also indicates that there is very little interest for its bonds. Spanish banks â¿¿ already burdened with toxic loans and assets â¿¿ have been buying up the bonds, which are being used to help prop up the banks â¿¿ trapping Spain and its banks in a vicious circle of debt. Independent audits on the state of Spain's banks are due Thursday and these will help Spain determine how much it needs from a â¿¬100 billion ($126 billion) lifeline the 17-nation eurozone has agreed to be set up. It is not clear when the government will release details of the audits. Other European countries have been eager to learn Spain's bank bailout needs. "It is important and right that Spain will in the next few days make an application, specify (its needs) regarding aid for the problems in the banks," German Chancellor Angela Merkel said in Berlin.