The price of Spanish treasury bills has plunged in secondary bond markets, causing bond yields to rise and future borrowing costs for the crisis-hit country to soar. This is a sign that Spain's fiscal woes may escalate.
The yield of benchmark 10-year treasury bills rose sharply in secondary bond markets Friday morning, jumping to 6.177 percent from 6.061 percent on Thursday.
After easing in recent days, the rise in yield is a worrying sign, indicating that investors increasingly sell Spanish government bonds, possibly fearing that the debt-stricken country might need an EU-funded bailout soon.
Already saddled with record unemployment and an economy deep in recession, the Spanish government is struggling to shore up a series of banks which are hugely undercapitalized due to bad loans in the wake of the country's bursting real estate bubble in 2008.
Spain's fiscal problems were compounded Thursday, as international ratings agency Fitch cut Madrid's creditworthiness by three notches from a previous A rating down to triple B, which is close to junk bond status.
The ratings downgrade came after Fitch calculated that the Spanish government's funding needs for rescuing its banking sector would be "at least" 60 billion euros ($76 billion).
"The cost of bank restructurings may rise to 100 billion euros in a more severe stress scenario," Fitch added.
In addition, the ratings agency described Spain as "especially vulnerable to contagion from the crisis in Greece," highlighting its "limited ability to intervene decisively" should the banking sector deteriorate sharply.
Fitch concluded that all this was increasing the "likelihood of external support."