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Read more at Counterparties Is private equity driving "dental abuse?" JPMorgan's trading losses grow even larger Sign up for the Counterparties newsletter! Follow Reuters Facebook Twitter RSS YouTube Read Iran attack decision nears, Israeli elite locks down 11:43am EDT Analysis: Greeks not alone in bank savings exodus 8:15am EDT Plans to strike Iran "ready," says U.S. Israel envoy 6:51am EDT Insight: Greek exit could cost eurozone 100s of billions of euros | 8:29am EDT Several brokerages stop taking Facebook IPO orders | 16 May 2012 Discussed 172 Romney apologizes for bullying incident at school 158 Germany’s Merkel dealt heavy blow in state vote 112 Weary warriors favor Obama Watched A look at the UK’s most beautiful face Thu, May 10 2012 Paralysis patient tastes freedom through thought control Wed, May 16 2012 Surfer rides 78-foot wave to world record Fri, May 11 2012 Pictures Reuters Photojournalism Our day's top images, in-depth photo essays and offbeat slices of life. 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Credit: Reuters/Paul Hanna By Sonya Dowsett and Paul Day MADRID | Thu May 17, 2012 11:27am EDT MADRID (Reuters) - Spain's borrowing costs shot up at a bond auction on Thursday, after economic data confirmed the country is back in recession and reports of an outflow of deposits from nationalized Bankia hammered its share price. The Spanish Treasury had to pay around 5 percent to attract buyers of three- and four-year bonds. The longer-dated paper sold with a yield of 5.106 percent, way above the 3.374 percent the last time it was auctioned. "This ... fits the pattern of recent sales, with the Spanish treasury successfully getting its supply away but at ever-higher yields," said Richard McGuire, rate strategist at Rabobank in London. "This unfavorable trend looks set to remain firmly in place ... Ultimately, this ratcheting up of yields will likely require some form of outside intervention," McGuire said. Spanish Prime Minister Mariano Rajoy said on Wednesday his government, struggling to reduce its budget deficit, could soon find it difficult to fund itself affordably on the bond market unless the pressure eases. His finance minister, Cristobal Montoro, meets heads of finance of all 17 regions later to review their budget plans which are a crucial plank of the drive to lower public debt. The European Commission warned last week that stubbornly high debts in the regions and the welfare system would prevent Spain meeting its deficit goal of 5.3 percent of GDP this year. Spain's 10-year yields have spiked back above 6 percent, which investors view as a pivot point that could accelerate a climb to 7 percent, a cost of borrowing widely seen as unsustainable even though Madrid has sold well over half its debt needs for the year. WORRY LIST Top of the heavily indebted country's worry list is a banking sector beset by bad loans, the result of a property boom that bust in spectacular fashion. El Mundo newspaper reported that customers at troubled Bankia SA had taken out more than 1 billion euros ($1.3 billion), equivalent to around 1 percent of the lender's retail and corporate deposits, over the past week. The government denied there had been an exit of funds, but the bank's shares dropped more than 20 percent at one stage, extending the previous session's loss after it delayed publishing fourth-quarter results. "It's not true that there is an exit of deposits at this moment from Bankia," said Economy Secretary Fernando Jimenez Latorre. The government last week took over Bankia, the country's fourth-largest lender which holds around 10 percent of Spanish deposits, in an attempt to dispel concerns over its ability to deal with losses related to the 2008 property crash. "The majority of outflows came after the chairman resigned last week, but I think once the bank was taken over by the government, depositors calmed down a bit," said one Madrid-based trader. "The share price fall has to do with disappointed retail investors dumping the stock." Spain's deposit guarantee fund guarantees 100,000 euros per customer. "I have two accounts with Bankia and up to now I have not closed them. I'm not even considering it," said Jose Ignacio Gonzalez, 42. "It must be more secure with the backing of the state, it has a guarantee." The problem for Madrid is that property losses facing banks are not yet quantifiable, given prices are likely to fall further. The government told the sector last week to set aside another 30 billion euros in provisions, prompting some analysts to say much more would need to be done. A government spokeswoman said the bidding to select an external auditor to value real estate assets across the banking sector was still open, denying Oliver Wyman and BlackRock had been chosen as sources previously told Reuters. RECESSION AND CONTAGION While Greece, facing fresh elections which could hasten its exit from the euro zone, has dominated headlines, uncertainty over the final cost of Spain's banking reform has raised the prospect that it could require an expensive international bailout, a bill the euro zone would be stretched to cover. Stuart Gulliver, head of Europe's biggest bank HSBC, reflected on his biggest external concerns. "It's absolutely how the euro zone plays out and whether Greece stays in, and/or whether firewalls are high enough to protect Spain and frankly whether markets take things into their own hands before (Greek elections on) June 17," he said. Official data confirmed the Spanish economy shrank by 0.3 percent in the first quarter, putting it back into recession and facing a prolonged downturn as the government cuts spending in an attempt to wrestle down its budget deficit. Unemployment is already running close to 25 percent, rising to around 50 percent among the young. The government will publicize budget plans from 17 powerful autonomous regions later on Thursday, possibly rejecting some of them if they do not make deep enough spending cuts and giving local officials 10 to 15 days to redo them. If the regional budgets are not approved by the end of the month, the central government can invoke a new law and take control of spending. The regions must cut 15 billion euros out of their budgets, after their overspending last year caused Spain to miss its deficit reduction target badly. Even if it puts its house in order, Madrid faces the threat of contagion from Greece if it elects an anti-bailout government next month, a move which could hasten a hard default and exit from the euro zone. "It's not Greece leaving the euro that is the major issue," said John Bearman, chief investment officer at Thomas Miller Investment, which manages roughly 3 billion pounds ($4.8 billion) of assets. "It's the domino effect." (Additional reporting by Steve Slater, Julien Toyer and Sarah White; Writing by Mike Peacock; Editing by David Holmes) World Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (2) TimWorstall wrote: Edition: U.S. Africa Arabic Argentina Brazil Canada China France Germany India Italy Japan Latin America Mexico Russia Spain United Kingdom Back to top Reuters.com Business Markets World Politics Technology Opinion Money Pictures Videos Site Index Legal Bankruptcy Law California Legal New York Legal Securities Law Support & Contact Support Corrections Connect with Reuters Twitter Facebook LinkedIn RSS Podcast Newsletters Mobile About Privacy Policy Terms of Use AdChoices Copyright Our Flagship financial information platform incorporating Reuters Insider An ultra-low latency infrastructure for electronic trading and data distribution A connected approach to governance, risk and compliance Our next generation legal research platform Our global tax workstation Thomsonreuters.com About Thomson Reuters Investor Relations Careers Contact Us Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests. NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.

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