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Costs of loans rise to 10-year high in Spain

Bonds react to banks' downgrade

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Officers patrol amid smoke from rockets launched by miners protesting Spain's austerity measures.

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MADRID -- Spain's benchmark borrowing rate hit its highest since the country adopted the euro currency after ratings agency Fitch downgraded 18 banks on Tuesday. Investors continued to find more questions than answers in the country's decision to seek a $125 billion euro zone bailout fund.

Spain entered the euro zone in January, 2002.

The yield on Spain's 10-year bond rose to 6.81 percent, bringing Spain's borrowing costs close to 7 percent -- the level at which Greece, Ireland, and Portugal sought international bailouts.

Spain agreed last weekend to take a European bailout for its banks, tapping into a $125 billion euro zone bailout fund. But investors are worried the government may have trouble paying the money back.

"Bailout lite has come and gone," said Rob Carnell, chief international economist at ING in London. "We got about three or four hours of respite."

Mr. Carnell said euro zone leaders have been learning from mistakes and there were reasons to hope they would still meet the challenge ahead of them. But for now, the Spanish plan appeared to be a flop because "it doesn't make Spain grow, it doesn't address the government's debt problem or the problems in the housing market."

Fitch said its downgrade of the banks was a result of a previous downgrade of the Spanish sovereign debt on June 7. Fitch said it had conducted stress tests, both on the Spanish banking sector as a whole and on individual banks, updating results from tests done in 2011.

The ratings agency said the weakness of the Spanish economy would continue to have a negative effect on business volumes "which, together with low interest rates, will place pressure on revenues."

Concern has been growing that an increasingly large amount of Spanish government debt is being bought by its banks as the country finds fewer international buyers for its bonds. As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is having more difficulty selling its bonds.

The rescue package for Spain's crippled lenders was announced Saturday, but the exact amount the country's banks will receive has not yet been published.

Meanwhile, Cyprus has begun preparing euro zone countries and its own public for the likelihood of a bailout application before it takes over the European Union presidency at the start of July, European officials said Tuesday.

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