Spain paid a euro-era record price to sell short-term debt on Tuesday, pushing it closer to becoming the biggest eurozone country to be shut out of credit markets.
The soaring borrowing costs highlight the shortcomings of a June 9 eurozone deal to lend Spain up to 100 billion euros ($126 billion) for its banks. They also illustrate how Europe's problems run much deeper than Greece, brought back from the brink of default in Sunday's parliamentary election.
Leaders of the world's major economies, meeting for a G20 summit in Los Cabos, Mexico, piled pressure on the eurozone to take decisive steps towards a fiscal and banking union to stem a two-and-a-half year old debt crisis that is holding back the global economy.
German Chancellor Angela Merkel, leader of Europe's biggest economy and main paymaster, agreed to move towards a more integrated banking system, according to a draft G20 communiqué, but she continues to rule out metalizing the eurozone's debts.
Spain, the eurozone's fourth largest economy, had to pay 5.07 percent to sell 12-month Treasury bills and 5.11 percent to sell 18-month paper - an increase of about 200 basis points on the last auction for the same maturities a month ago.
While Spain's 10-year bond yields eased slightly to around seven percent after the sale, the auction underscored the government's increasingly shrill pleas for help from the European Central Bank, two days before Madrid tries to sell three-to-five year bonds.
Treasury Minister Cristobal Montoro said on Monday the ECB should step in to fight market pressure, essentially a call for the bank to buy Spanish bonds again, as it did last year.
Those appeals have so far gone unheeded, partly because the ECB believes it can have little lasting influence on market confidence unless eurozone political leaders take bold decisions to strengthen the 17-nation currency zone.
The central bank, the only federal institution with the capacity to act swiftly and decisively, is also split between hawks and doves, with German-led hardliners publicly opposing further purchases of government bonds of debt-stricken nations.
ECB President Mario Draghi, who is attending the G20 summit at which Europe's debt crisis is the central focus of global concern, said this month it was up to Europe's politicians to act to fix the eurozone.
But he hinted last Friday the bank may soon cut interest rates, pointing to heavy downside risks for the European economy and saying there was no inflation risk in any euro area country.
Speaking to reporters on the sidelines of the G20 summit, Spanish Economy Minister Luis de Guindos said Madrid's policies were not to blame for the loss of investor confidence.
"We think ... that the way markets are penalizing Spain today does not reflect the efforts we have made or the growth potential of the economy," he said. "Spain is a solvent country and a country which has a capacity to grow."
Some market experts said the strong demand at Tuesday's T-bill auction reflected expectations that Spain would be able to avoid a full state bailout of the kind international lenders have provided for Greece, Ireland and Portugal.
A market maker in Spanish bonds, who declined to be identified by name because of the sensitivity of his position, acknowledged that it was becoming harder to sell Spanish bonds as the impact of massive cheap three-year ECB loans to banks early this year wore off.
But he said: "I don't think things look catastrophic for Spain as eventually some solution will have to be found, or the ECB will have to step in again.
"It's in no one's interest to see Spain bailed out, because then there will be questions as to whether there are enough funds, and questions over Italy."
But others voiced doubt that Spain, a proud, ancient nation that was a fast-growing star of the eurozone for a decade until a housing bubble burst in 2008, could avoid a sovereign rescue.
"It looks as though the market's broken now. I don't think there's anything the Spanish can do to bring it back. I don't think the ECB can bring it back... (a full sovereign bailout for Spain) is inevitable," said Harvinder Sian, a rate strategist at London-based RBS, speaking before Tuesday's auction.
"With the (G20) summit not looking like it will produce anything particularly dramatic to help in the crisis situation, I think the market's made its statement. There has to be a change in the way the Europeans are attacking the crisis."
In Athens, mainstream political leaders raced to build a coalition government led by conservative New Democracy leader Antonis Samaras, that would seek to renegotiate the terms of Greece's 130 billion euro EU/IMF bailout agreement.
But a wide gap yawned between the ambitious objectives for more time and easier conditions of the Greek pro-bailout parties and the willingness of European partners to make minor adjustments to the austerity and reform package.
Samaras has said he wants two extra years to bring Greece's public deficit down to the EU limit of 3 percent of GDP by 2016 instead of 2014, spreading out 11.7 billion euros of spending cuts due next month over the next 18 months.
But a senior eurozone official in Brussels said that while details of the bailout were "changeable" and could be adapted, the drive to bring Greek debt down to a manageable level and push through structural economic reforms would not weaken.
With trust in Greek politicians at a low ebb, EU governments want to see a new administration implement long delayed public sector job cuts, privatizations and closures of loss-making enterprises as well as tougher anti-corruption measures.
The so-called "troika" of European Commission, ECB and International Monetary Fund will return to Athens next month to review Greece's implementation of its bailout commitment. It is almost certain to say the second adjustment program agreed earlier this year is already off track.
In another example of domestic constraints facing eurozone governments, Germany's top court said Merkel's government did not consult parliament sufficiently about the configuration of Europe's permanent bailout scheme, but experts said it should not hamper Berlin's ability to react to the debt crisis.
The European Stability Mechanism (ESM) is supposed to come into effect in July but has not yet been ratified by many eurozone member states' parliaments, including Germany's Bundestag.
After the constitutional court ruling, which responded to a complaint from the opposition Greens, the euro fell to a session low versus the dollar.
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