Spain's borrowing costs inch closer to 7%

Spain's borrowing costs rose for the second day in a row Tuesday as investors worried about details of how a lifeline of up to $125 billion from other countries in the euro zone will be deployed to save Spanish banks.

The yield on Spain's 10-year bond rose to 6.78 per cent, close to the 7 per cent level that forced Greece, Ireland and Portugal to ask for more severe rescues of their public finances.   

The rescue package was announced Saturday, but the rally was short-lived, as investors still don't have details of how much Spain's banks will receive, or what the repayment terms of the loan will be. The government is waiting for the results of two audits before deciding how much of the funds it will draw upon.

"EU leaders continue to give their best impression of blind men groping around in the dark for a solution to the debt problems afflicting Europe," said Michael Hewson, senior market analyst with CMC Markets.

There are also fears that private bondholders could be placed lower in the pecking order of debt repayments if policymakers ensure that the eurozone's rescue fund is prioritized. That's causing them to demand a higher premium in order to lend money to Spain.

There are also broad concerns that Spain is simply too big to save. The continent's fourth-largest economy has an unemployment rate of 25 per cent, and should it topple it would likely be too much for the EU's contingency funds to absorb.

Investors are also worried about Greek elections next Sunday that could determine whether Athens stays in the single currency.