Market door closed to Spain: Treasury minister

MADRID Tue Jun 5, 2012 4:15am EDT

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MADRID (Reuters) - Spain's high borrowing costs mean it is effectively shut out of the bond market, Treasury minister Cristobal Montoro said on Tuesday, prompting the euro to hit a session low.

The country will test the market on Thursday and issue up to 2 billion euros ($2.5 billion) in medium- and long-term bonds at auction.

"The risk premium says Spain doesn't have the market door open," Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."

The risk premium investors demand to hold Spanish 10-year debt rather than German equivalents hit a euro era high of 548 basis points on Friday, on concerns that Spain's fragile banking system and heavily indebted regions will eventually force it to seek a Greek-style bailout.

The euro fell to a session low against the dollar and Bund futures rose in response to Montoro's assessment. However, Spain's stock market extended its gains and 10-year Spanish yields were steady at 6.4 percent.

"Uncertainty is still high and now we have these comments just before the auction on Thursday," one bond trader said.

Prime Minister Rajoy has also voiced concern that Spain cannot continue to finance itself on the market at such high borrowing costs indefinitely. He has called repeatedly for urgent action, which is understood to be aimed at the European Central Bank to revive its bond-buying programme or inject more liquidity into the financial system.

Finance chiefs of the Group of Seven leading industrialized powers will hold emergency talks on the euro zone debt crisis on Tuesday, with Spain being one of the main concerns.

Spain still needs to refinance about 82 billion euros of debt this year, while helping its regions to repay maturing debts of about 16 billions euros in the second half of 2012.

It also said it would inject 19 billion euros in to nationalized lender Bankia and would seek to recapitalize its entire banking sector once it gets the results of an independent audit of the financial system.

Montoro said he did not expect the bill to recapitalize Spanish banks to be too large. He added that neither Germany nor France had pushed Spain to seek an international bailout.

Spain is pressing for a direct European rescue for its banks, without the government having to ask for help, but Germany has appeared to rule out such a "bailout lite" for the euro zone's fourth biggest member.

(Reporting by Julien Toyer; Editing by Fiona Ortiz/Mike Peacock)

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