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Originally published Thursday, May 31, 2012 at 5:27 AM

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Spain bond yields rise as minister warns on euro

Spain saw its bond yields shoot up again on Friday after the country's economy minister warned that the future of the euro will be determined in the next few weeks and will depend on the stability of Spain and Italy.

The Associated Press

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MADRID —

Spain saw its bond yields shoot up again on Friday after the country's economy minister warned that the future of the euro will be determined in the next few weeks and will depend on the stability of Spain and Italy.

The interest rate on 10-year Spanish bonds stood rose 0.13 percentage points to 6.58 percent in early trading. The rate was more than 5.4 percentage points higher than the equivalent German one, which is considered a safe haven for investors.

Economy Minister Luis de Guindos said in a speech Thursday evening that Spain and Europe were at a crossroads as speculation mounts over whether the country will need a bailout. The danger is that Spain's (EURO)1 trillion ($1.24 trillion) economy is far bigger than those of already bailed-out Greece, Ireland and Portugal combined.

Spain's banking sector is laden with soured investments on real estate and the government needs (EURO)19 billion to rescue just one lender, Bankia SA, at a time of recession and crushing unemployment of 24.4 percent.

"I don't know if we are on the edge of a cliff, but we are in a very, very difficult position," de Guindos said Thursday evening in a speech to business leaders in Sitges, a resort town near Barcelona.

UBS Investment Research said there is no a consensus that the Spanish banking sector in general needs a big recapitalization. It estimated the sector needs between (EURO)80 billion and (EURO)100 billion in new funds.

"The Spanish State should be able to sustain the recapitalization costs without losing control of its finances," UBS analysts said in a note to clients. "We recognize however that financing this intervention in current market conditions will be difficult."

De Guindos said Europe needs new mechanisms, including one allowing the continent's bailout fund to inject capital directly into troubled banks rather than go through governments first. It also needs a pan-European bank deposit insurance plan like the United States has, he said. German, however, opposes the idea because it fears it could be left paying for the bulk of new rescues.

De Guindos also backed calls for a "banking union" with closer coordination among regulators of different euro zone countries.

"The future of the euro is going to play out in the next few weeks in Spain and Italy," de Guindos said.

The IMF on Thursday denied a report that it was already preparing a bailout for Spain.

Bond yields - a measure of investor confidence in a country's debt - were also very high in Italy, with the 10-year rate rising to 5.92 percent on Friday.

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