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Spain borrowing costs soar after Moody's downgrade
Spain's bond yield hits a record near 7 pct after Moody's downgrade to near junk bond status
By The Associated Press

MADRID (AP) ' Spain's borrowing costs hit a high not seen since the country joined the euro in 1999 after a credit ratings agency downgraded the country's ability to pay down its debt.

The interest rate ' or yield ' on the country's benchmark 10 years bonds rose to a record 6.89 percent in early trading Thursday, close to the level which many analysts believe is unsustainable in the long term and at which countries such as Greece, Ireland and Portugal have sought an international bailout.

The ratings agency Moody's downgraded Spain's sovereign debt three notches from A3 to Baa3 Tuesday evening ' just one notch above "junk status".

Moody's said the downgrade was due to the offer from eurozone leaders of up to '100 billion to Spain to prop up its failing banking sector, which the ratings agency believes will add considerably to the government's debt burden.

This score will means that even fewer investors will buy Spanish debt as organizations such as pension funds are mandated not to invest in assets with such a low score.

The bailout was meant to recapitalize the banking system and calm Europe's debt crisis. But instead worries that Spain's government investors do not seem reassured and Spanish bond yields ' a measure of investor jitters ' have risen all week.

The ratings agency said the Spanish government's ability to raise finance on the world's markets was being hindered by high interest rates, a situation which had led it to accept Eurogroup funds to recapitalize debt-burdened banks.

The Spanish government's erratic response to the crisis has irritated European Union leaders, Spain's leading newspaper El Pais said on its front page Thursday.

The paper said Prime Minister Mariano Rajoy has come under criticism in EU circles for presenting the bailout as a "light" measure and a victory for Spain and the Euro, leading to an outcry for similar treatment by other austerity-saddled bailout countries such as Portugal and Ireland which have had to struggle with heavy, externally imposed fiscal controls.

However, speaking to the German parliament in Berlin on Thursday, Chancellor Angela Merkel said: "Spain is implementing the right reforms."

"The Spanish Prime Minister is doing this with great courage and great determination," she added.

Merkel again welcomed Spain's move to apply for European funds to recapitalize its banks. "We know banks must be reasonably capitalized to do keep the economy afloat, that is the lesson from 2008, 2009," she said.

"The faster Spain gets the application done, the better," she said.

Spain's benchmark stock index, IBEX-35, began downwards 0.6 percent in early trading Thursday.


Daniel Woolls in Madrid and Juergen Baetz in Berlin contributed to this report.

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