Spain's borrowing costs ease

The cost for Spain to borrow got slightly cheaper on Wednesday, an encouraging sign that investors are feeling a bit more confident about the debt-laden country's prospects.

The yield on 10-year Spanish bonds sat at 6.22 per cent on Wednesday, nine basis points lower than where it was a day earlierand marginally further away from the sevenper cent threshold that's generally seen as unsustainable.

The slight easing was enough to move the spread between what perceived safe haven Germany pays and what Spain pays to under five per cent for the first time in over a week.

'The richer countries have to reach into their pocketbooks' CIBC economist Avery Shenfeld

The drop came a day after Spanish lawmakers acknowledged in the clearest way yet that they are seeking help from other governments for their struggling banking sector.

Finance Minister Cristobal Montoro warned Tuesday that the high risk premium of recent week indicated "the door to the markets is not open for Spain."Meanwhile , Spanish Prime Minister Mariano Rajoy pleaded with European leaders "to support those that are in difficulty" and push toward greater fiscal unitya step that might allow its troubled banks to get direct financial help.

Spain's public finances, and the balance sheets of its banks, are awash in toxic red ink related to overvalued real estate assets that crashed when a property bubble burst more than two years ago.

At the end of May, Spain's most stricken lender, Bankia said it needed 19 billion euros(more than $23 billion Canadian) in government aid to shore up its finances against losses on its toxic home loans.

But Spain itself has onlyfive billion euros left from a 19-billion-euro fund it created in 2009 to bail out banks. That means other European nationswill likelyhave to step up and lend a hand, a politically unpopular gesture.

Flight to safety

"You have to accept we're in the same boat to some extent and German banks need Spain, for example, to get out of this too," CIBC economist Avery Shenfeld said. "The richer countries have to reach into their pocketbooks. They are not doing this out of charity, they are doing it because the economies are interconnected."

That's not necessarily going to happen, so concerns about Spain's debt load have sent the yield on Spanish debt to dangerously high levels and close to the crucial 7 per cent ceilinga point at which other eurozone countries such as Greece, Ireland and Portugal sought a bailout. The country has become the focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would stretch the region's finances to breaking point.

"If the euro is to survive as a currency, the world will have to evolve into fiscal integration and that is a critical step and that has been perhaps the main roadblock for the resolution of the crisis up until this point," TD Bank economist Martin Schwerdtfeger said.