MADRID: Spain's economy sank deeper into recession in the second quarter, the Bank of Spain said on Monday, as markets spooked by funding problems in the country's regions pushed it ever closer to a full international bailout.
The economy contracted by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter of the year, the central bank said in its monthly report.
As Spain's benchmark 10-year debt yields rose further above the 7 percent level that triggered an unsustainable spiral in borrowing costs for the euro's zone existing bailout recipients, Economy Minister Luis de Guindos ruled out a full-scale rescue on top of the 100 billion euros earmarked for the country's banks.
Ministers in Madrid insist there is little more they can do to bring the borrowing costs down, but the central bank's deputy governor said more austerity was needed.
"(Current market problems) reflect problems in Spain as well as the euro zone," Fernando Restoy said after a conference in Madrid when asked about market stress.
"We need to continue further along the same line. We need more cuts, more reforms which will restore market confidence and mechanisms which will strengthen the monetary union."
Earlier, media reports suggested half a dozen regional authorities were ready to follow in the footsteps of Valencia in seeking financial aid.
Prohibitively high refinancing costs have virtually shut all of the 17 regional governments out of international debt markets, forcing the worst hit to seek loans from the central government to meet bond redemptions.
In a sign of mounting concerns among the euro zone's heavy hitter of the need to shore up Spain, minister De Guindos will travel to Berlin on Tuesday to meet with his German counterpart Wolfgang Schaeuble.
The unease was reflected in Spanish bond prices, which went into free-fall in illiquid markets, with 10-year yields up over 30 basis points at 7.59 percent and two-year yields up almost 90 bps at 6.64 percent.
The cost of insuring Spanish government bonds against default rose to a record high, and the blue-chip stock market index Ibex hit its lowest level since 2003.
Spain slipped into recession for the second time since 2009 in the first quarter and the government said on Friday it expects the economy to continue to shrink well into next year, fuelling market tensions.
The blue-chip stock market index Ibex hit its lowest level since 2003 on Monday while Spanish borrowing costs for five year debt soared to their highest since 1996.
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