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Spain's Borrowing Costs Continue To Rise

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Spain's Borrowing Costs Continue To Rise

Europe

Spain's Borrowing Costs Continue To Rise

Spain's Borrowing Costs Continue To Rise

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For months, Spain's borrowing costs have been hovering near levels that sent Greece, Ireland and Portugal into bailouts. Spain will have to cough up nearly $40 billion to pay interest on its debts this year alone. That's many times what's been cut from things like health and education, which has Spaniards so upset. But the only alternative to raising money on markets is simply to stop spending it. Last week, Prime Minister Mariano Rajoy signaled he may simply give up, and try to rely on tax revenue alone.

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Spain's borrowing costs have been hovering near levels that sent Greece, Ireland and Portugal into bailout territory. The Spanish government will have to cough up nearly $40 billion to pay interest on its debts this year alone. That is many times what has been cut from things like health and education. And the only alternative to more borrowing is to stop spending.

As Lauren Frayer reports from Madrid, that could mean austerity at a level no one has seen so far.

LAUREN FRAYER, BYLINE: Most countries can't cover their expenses with tax revenue alone. They have to sell treasury bonds, which are paid back at a later date, plus interest. The problem here in Spain is those interest rates. Because investors worry Spain might not pay them back, 10-year Spanish bonds promise more than a 6 percent return. That's a bigger payout than any savings account and most stock funds these days. And it's more than three times what the U.S. government pays to borrow.

Economist Gayle Allard says those high rates are exorbitant.

GAYLE ALLARD: Obviously things are bad here. But I think the beating Spain is taking has more to do with, you know, OK, Greece is going to leave the euro, who's next, who's next, who's next? There we are. Still, as bad as the economic and financial realities are, I don't think that the spread responds to them.

FRAYER: That spread is the difference in interest rates between German bonds' low and Spanish bonds' high. The gap hit a record last week. And, fair or not, it prompted alarm from Spanish Prime Minister Mariano Rajoy in parliament last week.

PRIME MINISTER MARIANO RAJOY: (Foreign language spoken)

FRAYER: At this moment there's a serious risk they'll stop lending to us, or only lend to us at an astronomical rate, he said. This year, the government of Spain will have to pay only in interest on its debt - 30 billion euros, he said. Do you understand that? We can't continue with this situation, he said.

The only way out of the pit Spain finds itself in, Rajoy said, is more budget cuts. Spain can no longer borrow its way out of recession.

Think of it like a mortgage Spain has to keep refinancing, in order to make its payments but then suddenly rates start climbing, says economist Javier Diaz-Gimenez at IESE Business School.

JAVIER DIAZ-GIMENEZ: It snowballs on you, basically. In order to refinance, you need more money. And eventually, you might get investors completely just refusing to refinance at any price. Then you have a run on debt and then the government has no choice but to go bankrupt.

FRAYER: Even if Spain were to balance its budget immediately, it would still owe interest on existing debt. Rajoy would need a budget surplus if he wanted to give up on the markets all together. That's hard enough in the boom years and pretty much impossible now. So Spain must cut whatever spending it can and quick. Markets are already losing faith.

GONZALO GARLAND: Well, I think time is - I don't think they have any time.

FRAYER: Gonzalo Garland is an economist at Madrid's IE Business School.

GARLAND: So this probably requires constant measures. It's not just a question of doing some measures now and then waiting three or four months. It probably needs permanent action. That's what we're seeing every week.

FRAYER: Every Friday, Spain's cabinet announces more cuts. And every weekend, people take to the streets to protest. Now, it's public school teachers who are on strike.

(SOUNDBITE OF CHANTING PROTESTERS)

FRAYER: Elementary school teacher Julio Molina says he's worried about the future.

JULIO MOLINO: We are almost bankrupt and in a few months we are going to be like Greece. We don't have money to pay the debt.

FRAYER: There's panic in the streets. But Garland, the economist, says such cuts are necessary to prevent even greater panic by markets.

GARLAND: All financial crises have occurred when there's this panic spreading and everybody thinks that something is going to happen.

FRAYER: And if too many people think something is going to happen, Garland says, markets have the power to make it happen, in the end.

For NPR News, I'm Lauren Frayer in Madrid.

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