LONDON, May 28 (Reuters) – The risk premium on Spanish government debt hit a euro-era high on Monday, and looked set to keep rising as investors factored in the growing cost of shoring up the country’s banking sector.

Government sources told Reuters Spain may bolster Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders. Such liabilities pump up the state’s borrowing costs which are already near levels deemed as unsustainable.

Although Prime Minister Mariano Rajoy ruled out seeking outside help to fix banking problems, analysts say Spain is nearing that moment. They expect Spanish yields to rise regardless of whether underlying fears that Greece may soon leave the euro subside or not.

“You’ve got these banks which are struggling and will continue to struggle … and the government is far from a situation where you can bet on them achieving their targets for this year,” said RBS euro area economist Silvio Peruzzo.

“The market I think will continue to push (yields) higher and then we will get some form of external support.”

Spanish 10-year bond yields rose 19 basis points to as high as 6.53 percent, their highest since November 2011 before the European Central Bank injected cheap three-year loans into the banking system.

Monday’s move pushed the yield premium over safe-haven German Bunds to 515 basis points, its widest in the 13-year history of the euro.

LONDON, May 28 (Reuters) – The risk premium on Spanish debt hit a euro-era high on Monday, and looked set to keep rising as investors factored in the rising cost to the public purse of shoring up the country’s banking sector.

A Spanish government source said the country may use government debt to recapitalise its fourth-largest lender Bankia , which last week asked for a 19 billion euro bailout to stem losses related to soured property loans.

“Spain is under a lot of pressure right now on Bankia and the never-ending cost of the bailout there,” a trader said.

The plan could bump up Spain’s national debt, adding pressure to public finances already strained by stifling austerity and weak growth. On Friday, the country’s wealthiest autonomous region said it needed government help to plug a funding gap.

The gap between Spanish and German 10-year bond yields, which measures the risk investors attach to holding Spain’s debt rather than safe-haven German Bunds, widened to 512 basis points - its widest in the 13-year history of the euro.

The 10-year Spanish bond yield rose to 6.5 percent – its highest since November 2011, when the European Central Bank was forced to step in and buy the country’s debt.

“Until we see where the property market bottoms out and how much recapitalisation the banks need, investors will continue to remain very cautious towards Spanish bonds,” said Nick Stamenkovic, strategist at RIA Capital Markets.

LONDON, May 25 (Reuters) – Spanish government bond yields rose on Friday after the Catalonia region said it needed financial help from the centre, with no respite seen in the near term for the troubled sovereign, also at risk of contagion from the Greek crisis.

The debt burden carried by Spain’s 17 regions, doubts that it can control its budget deficit, and worries over the health of its banks have raised worries that the euro zone’s fourth largest economy might eventually need an international bailout.

Its 10-year yields rose 16 basis points on the day to 6.335 percent and were seen headed to unsustainable territory beyond 7 percent unless underlying worries that Greece could leave the euro after its June 17 elections subside.

“It seems that Spain is getting hit by a double whammy right now, not just the banking sector, but the regions as well … that’s the turnaround that we’ve had this afternoon,” said WestLB fixed income strategist John Davies.

Spain has underperformed all the euro zone countries still financing themselves via markets, including fellow struggler Italy, since its new government said in February it would miss its 2011 budget deficit target by miles, shocking markets.

It also unilaterally eased its 2012 deficit target before later agreeing a compromise figure with the EU.

Sandra Holdsworth, who oversees just under 400 million pounds at Kames Capital, has a “fairly neutral” position on most euro zone bonds, but is “slightly underweight” Spain.

LONDON, May 25 (Reuters) – French bond yields hit a 22-month low on Friday, leading a sharp rally in non-German debt, as investors pumped cash into assets offering a better return than that on the region’s safe-haven Bund.

The growing momentum behind buying of French, Austrian and other higher-yield euro zone debt weighed on German Bunds, pushing yields further away from the record lows hit midway through Thursday’s session.

“In the absence of bad news there’s a bit of a hunt for yield. Bunds are at such a low level I think there’s some strategic reallocations going on,” said Rabobank strategist Lyn Graham-Taylor.

The risk that Greece may be forced out of the currency bloc following June 17 elections, and the unknown repercussions that would bring for the whole euro zone, has pushed investors to seek out the safety of German debt despite ultra-low yields.

Analysts said there was no clear trigger for the move into other sovereigns, and that it could reverse quickly if worries about Greece’s future, Spain’s struggling banking sector or general weak growth in the bloc were again pushed to the fore.

“There’s not much in terms of fundamental news so you can’t really apply any sort of logic to the day-to-day moves,” said Orlando Green, strategist at Credit Agricole.

“Bunds are moving moderately lower and that’s to be expected with this risk-appetite move … but I don’t think that’s going to be sustained. Overall we’re still in a friendly environment for German Bunds right now.”

LONDON, May 23 (Reuters) – U.S. money market funds remain cautious over their lending to European banks, trimming exposure by 2 percent since the end of March, Fitch ratings said on Wednesday, but the data showed no sign of another dollar funding crunch on the horizon.

Despite high anxiety in the financial markets over the growing possibility that Greece may be forced to leave the euro zone, the Fitch data shows Europe’s banks are still able to borrow the dollars they need from the U.S. market.

“(Money market fund) holdings appear to be following a ‘wait and see’ approach until a clearer pattern emerges,” Fitch wrote in the report.

In late 2011, access to dollars froze up as U.S. lenders cut lines of credit when the euro zone debt crisis threatened to engulf the large economies of Italy and Spain. This forced euro zone banks to pay a huge premium to get hold of U.S. currency.

Overall lending to European banks is still half what is was in May last year, Fitch said. In part, this can be ascribed to financial institutions cutting back on their dollar liabilities and the provision of cheap loans from the European Central Bank.

“We saw (last year) the risks that U.S. funding could vanish quite quickly, so on the one side we have reliance on dollar funding maybe slightly lower, and then the ECB still provides a psychological backstop with its tenders,” said Commerzbank strategist Benjamin Schroeder.

In November the three-month cost of swapping euros into dollars, a key funding channel for banks and a gauge of stress, hit 167 basis points. The premium on Tuesday was 53 basis points .

LONDON, May 21 (Reuters) – German government bond prices held close to record highs on Monday as investors fretting that Greece may have to leave the euro zone pursued their flight to assets from the bloc’s strongest economy.

Financial markets took only limited comfort from a weekend summit of the Group of Eight economies, which offered verbal support for Greece to remain in the euro and growth policies to fight recession, but little sign of decisive action.

Confidence in the euro zone has been hit by Greece’s failure to form a government and the risk that a popular backlash against austerity could cost the debt-ridden country its bailout funds and force it to abandon the euro.

“People are really unsure of the way forward and so in that situation they migrate towards the safest assets and Bunds are still one of those,” said Eric Wand, strategist at Lloyds Bank in London.

German Bund futures edged 7 ticks lower on the day to close at 143.57, as some investors used the lack of any fresh negative news as a chance to take profit on the rise to record highs that peaked at 144.06 on Friday.

A Reuters poll of money market traders showed a slim majority believe Greece will still be in the euro zone at the end of 2013.

Spanish bond yields did not extend their recent steep rising trend but remained at elevated levels that keep pressure on policymakers to take fresh steps to tackle the region’s long-running debt crisis.

LONDON (Reuters) – Spanish banks could face fresh funding problems if plans to recapitalize the financial sector fail to convince investors it can withstand continued heavy losses on property loans.

Spain effectively nationalized Bankia, its fourth-biggest lender, on Wednesday in an effort to stall a four-year-old banking crisis, and is expected to outline further measures to shore up the system on Friday.

Financial sources told Reuters that Spain plans to force banks to set aside an extra 35 billion euros against loans made to the building sector, in addition to the 54 billion euros already set aside for this year.

But, with most Spanish banks unable to raise fresh capital from spooked investors, the prospect of further cash from already strained public coffers has done little to assuage concerns and access to vital funding markets has seized up.

The European Central Bank countered a previous funding freeze by offering three-year loans to banks. Analysts say Spanish banks borrowed enough to cover redemptions for 2012.

But that relief is already waning and the latest crisis of confidence over long-term solvency is threatening banks’ ability to resume normal funding when the ECB-bought calm runs out, and to cut off access to cash through the widely-used repo market.

“The problem is that liquidity doesn’t fix solvency. This is a capital issue,” said Alberto Gallo, head of European macro credit research at RBS.

LONDON, May 9 (Reuters) – Investors stepped up their retreat from riskier euro zone bonds on Wednesday, as selling drove Spanish yields above 6 percent on worries over how its banks would meet government demands for a hefty recapitalisation. This backdrop, combined with uncertainty about Greece’s political future, sent investors back to the safety of German debt and rising demand was expected to keep pushing 10-year bond yields lower after they fell below 1.5 percent for the first time ever.

“Spain is obviously in focus, it’s more fuel on the fire and there is only bad news today … all in all I think this turmoil is going to continue,” a trader said.

Financial sources said Spain will demand banks set aside another 35 billion euros to protect against souring building sector loans.

With capital markets largely shut for Spain’s embattled banking sector, investors fretted over whether the burden of providing extra funding may eventually fall to the state - already under pressure from markets over its own weak finances.

“We have always made the point that (Spain’s) bank and sovereign risk are closely correlated or very much interlinked and the market doesn’t really discriminate that much,” Michael Leister, strategist at DZ Bank said.

“It was really beneficial for both in January or February when you had this LTRO-related rally … and now we are seeing the other side of the coin, which is that concerns regarding the banks are hitting the sovereign as well.”

Spain’s 10-year government bond yields jumped 22 basis points to 6.09 percent. That represented their highest in around two weeks and traders pointed to a break of April’s high at around 6.16 percent as the potential catalyst for a new rapid rise.

LONDON, May 8 (Reuters) – The euro fell on Tuesday and was vulnerable to more losses as political uncertainty in Greece and a change of French president threatened to derail the austerity plans at the heart of efforts to tackle the euro zone debt crisis.

Greece’s two main pro-bailout parties failed to win a majority in weekend elections and attempts to form a coalition government were not expected to succeed, leaving questions over the country’s ability to avert bankruptcy and stay in the euro.

Meanwhile, Socialist French president-elect Francois Hollande has advocated an approach to tackling the debt crisis centred more on growth, which may create tensions with Germany’s insistence on fiscal austerity.

The euro was down 0.3 percent at $1.3027, off the previous day’s three-month low of $1.2955 and hovering just above the $1.30 level.

“The euro is at a vulnerable position at these sort of levels. Clearly, although we’ve had the elections in France and Greece, there is still a huge amount to be resolved,” said Jane Foley, senior currency strategist at Rabobank in London.

“There is certainly the prospect that the euro could be pushed well below the 1.30 level.”

Worries centred on Greece where the Left Coalition party will get a chance to form a government opposed to the country’s EU/IMF bailout. Their expected failure raised the chances that Greece could find itself without a government and out of cash by the end of June.

LONDON, April 27 (Reuters) – Spanish bond yields rose to the 6 percent danger level on Friday after a credit rating downgrade stoked fears about the euro zone’s heavy debtors, with a smooth Italian debt auction providing only limited relief.

Standard & Poor’s cut Spain’s credit rating by two notches to BBB+ late on Thursday and maintained a negative outlook, citing the deterioration of government finances and weakness in the Spanish banking sector.

In reaction, the 10-year Spanish bond yield hit a high of 6.03 percent, up 18 basis points on the day. The rise also reflected weak Spanish retail sales data and the threat of further downgrades.

“It’s difficult to see where any good news for Spain comes from … people are perhaps taking the view that now the downgrade has come for Spain, what could happen to Italy on that front?” said John Davies, strategist at WestLB in London.

The Spanish yield has briefly broken above 6 percent several times in recent weeks. Markets are wary that a sustained move would draw comparisons with the swift rise to an unsustainable 7 percent seen in Portuguese and Irish yields before both countries sought international bailouts.

The scale of the region’s debt problems were highlighted by S&P’s head of European ratings, Moritz Kraemer, who said there were downside risks to almost all euro zone sovereign ratings.

Nevertheless, Italy was able to negotiate a potentially tricky bond sale with the minimum of fuss, selling 5.95 billion euros of BTPs and avoiding the poor show of demand that some had feared following the deterioration in sentiment.