Spain tries to raise short-term funds

Struggles to avoid a full-fledged international bailout

Spain's struggle to avoid a full-fledged international bailout will be on display later on Tuesday when the government sells short-term debt amid widespread investor reluctance to hold peripheral euro zone paper.

The costs Spain will be required to pay are hard to assess because a combination of summer holidays and worries about the country's finances mean not much trading has been going on in recent days.

Demand from domestic banks will make sure the auction goes without a hitch, but with benchmark bond yields hitting euro-era highs on Monday the debt sale of 3 billion euros in 3- and 6-month bills is likely to be expensive.

Three-month bills sold in June yielded 2.362% at the time while 6-month bills yielded 3.237%. Both figures are high for the duration of the debt.

Uncertainty over the euro zone's periphery economies, whether the European Central Bank will be forced to act to slow rising yields and more bad news on the Spanish economy last week kept traders away from secondary markets on Monday.

"Since Friday, the market has run dry. Nobody is interested in buying or selling anything in case the ECB comes in, Europe offers some kind of solution or Spain takes some kind of aid. No one wants to buy, until we know what's happening, or sell, in case there's a light at the end of the tunnel," a Madrid-based trader said.

On Friday, the government said it expected the economy to remain in recession well into next year while the Valencia regional government became the first to ask Madrid for aid to pay overhanging debt obligations.

The premium investors demand to hold Spanish 10-year bonds jumped to its highest level since the birth of the monetary union, at 7.6%, on Monday while the cost to insure Spanish debt from default also hit record highs.

Ten-year yields of over 7% have triggered spiralling debt costs in other European economies which have eventually led to a bailout, though Spain's Economy Minister Luis de Guindos reiterated on Monday Madrid would not need more aid.

Financing costs on shorter maturity paper also jumped on Monday, with yields on the 2-year bond staging their largest one-day rise since before the euro was introduced.

Spain has already asked for up to 100 billion euros to recapitalise its ailing banks which have been battered by the four year economic downturn and a burst property bubble which has sent mortgages falling every month since August 2007.

"We're still in a very complicated situation which is not going to change until the markets have a clear road map, a precise calendar on how to solve the problems of the Spanish economy," Citigroup economist Jose Luis Martinez said.