SPAIN paid a euro-era record price to sell short-term debt on Tuesday, pushing it closer to becoming the biggest euro-zone country to be shut out of credit markets.
The soaring borrowing costs highlight the shortcomings of a June 9 euro-zone deal to lend Spain up to ?100bn 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 Group of 20 (G-20) summit in Los Cabos, Mexico, piled pressure on the euro zone to take decisive steps towards a fiscal and banking union to stem a two-and-a-half-year 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 G-20 communique, but she continues to rule out mutualising the euro-zone's debts.
Spain, the euro-zone's fourth largest economy, had to pay 5,07% to sell 12-month Treasury bills and 5,11% 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 7% after the sale, the auction underscored the government's increasingly shrill pleas for help from the European Central Bank (ECB), 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 euro-zone 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 G-20 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 euro zone.
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 G-20 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 penalising 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 bail-out 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 euro zone 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 (G-20) 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 ?130bn European Union-International Monetary Fund bail-out 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.
Mr Samaras has said he wants two extra years to bring Greece's public deficit down to the EU limit of 3% of GDP by 2016 instead of 2014, spreading out ?11,7bn of spending cuts due next month over the next 18 months.
But a senior euro-zone official in Brussels said that while details of the bail-out 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, privatisations and closures of loss-making enterprises as well as tougher anti-corruption measures.
The so-called "troika" of European Commission, ECB and IMF will return to Athens next month to review Greece's implementation of its bail-out 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 euro-zone governments, Germany's top court said Ms Merkel's government did not consult parliament sufficiently about the configuration of Europe's permanent bail-out 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 euro-zone 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.