Spain faces being locked out of debt markets as yields jump again ! Rajoy pleads for help from Europe even as he sounds like he's channeling " The Fly " ( Help Me , Help Me )

http://www.telegraph.co.uk/finance/financialcrisis/9270834/Spain-could-be-locked-out-of-the-markets-says-Mariano-Rajoy.html

Spain could be locked out of the markets, says Mariano Rajoy

Mariano Rajoy pleaded for an urgent “defence of the euro project” yesterday as Madrid was close to being locked out of international markets by “astronomical” borrowing costs.

Photo: Getty Images

By Louise Armitstead, and Fiona Govan

The prime minister of Spain called for European leaders to publicly back the so-called 'sinner states’ amid fears that contagion from Greece could trigger a highly-anticipated Spanish banking crisis and then a bail-out.

Mr Rajoy told state television there was “a serious risk we will not be able to borrow - or borrow at astronomical prices” unless they succeeded in bringing down the debt levels and regaining market confidence. “All these measures are to get out of the hole we find ourselves in,” he said.

He also fired a warning shot a Brussels after days of speculation about the break-up of the euro. “I would like a clear, strong message in defence of the euro project and an affirmation of the sustainability of the public debt of all the European countries that are subject to discussion at the moment,” he said.

Analysts at Citigroup said Spain would “probably require some form of troika programme in the course of the year.”

In Madrid, efforts continued to shore up Spain’s stricke banks. Shares in Bankia, the part nationalised lender, dropped more than 10pc after the Bank of Spain demanded a “stronger plan” for its recapitalisation.

Even so, as Greece continued its slide towards political and financial chaos, traders became more alarmed over Spain. Mr Rajoy joined calls for Greece to be kept in the euro, to stop contagion spreading. ”I don’t want Greece to leave the euro,” he said. “I think that would be an enormous mistake, very bad news.”

The warning came amid reports that one Cayman islands-based vulture fund, Dart Management, received almost 90pc of the €435m of debts that Greece repaid on Tuesday.

The fund, founded by American tax exile Kenneth Dart, was one of those that refused the debt restructuring deal that saved Greece from default in March.

The yield on Spain’s benchmark 10-year bonds hit 6.5pc - close to the 7pc danger level where Ireland, Greece and Portugal had to seek a bail-out. The spread over the German bunds soared over 500 basis points - a fresh record since the euro was launched.

Spanish bond yields dropped back to 6.3pc but economists still said the level was unsustainable. The euro hit a four-year low against the dollar and European markets fell.

Spain faces a big test on the bond markets today with the planned auction of €2.5bn of short-dated government bonds.

Italy was also swept back into the eye of the storm. Italian bond yields rose to 5.98pc - the highest since the end of January - as International Monetary Fund (IMF) warned Rome was also vulnerable. The fund said Rome was making progress with its austerity programme but warned that “renewed financial turmoil could push government bond yields higher, tighten bank credit and weaken activity.”

Rome was urged to speed up its efforts to overhaul its economy. “Slow progress in implementing needed fiscal and structural reforms could undermine confidence and raise concerns about Italy’s fiscal consolidation,” the IMF said.

The IMF also echoed Mr Rajoy’s call for greater support of the eurozone from the stronger northern core. It said that a eurozone “with greater fiscal and financial discipline and risk sharing would provide a more durable solution” to the debt crisis. The report said that “further monetary easing and unconventional measures as needed by the ECB” would help support Italy’s “adjustment efforts.”

Like Greek institutions, Italian banks were also suffering from outflows. But Jose Manuel Barroso, president of the EC, said: “There is no way of changing the commitments taken by Greece and also by the other 16 euro area member states.”