Spain's borrowing costs shot up Tuesday in an auction of short-term debt, in another sign that investors are growing more wary of holding the country's bonds amid fears that the eurozone's debt crisis is spreading.
That contagion is evident in the hike in Spain's borrowing rates in the secondary markets. The yield on its benchmark 10-year bonds soared to 6.25 percent Tuesday, not far short of the 7 percent rate considered unsustainable in the long-run.
Spain faces a big test of investor appetite this Thursday when it auctions between euro3-4 billion ($4.1-5.8 billion).
The ratcheting up of the pressure on Spain's public finances is forming the backdrop to this Sunday's general election, at which the opposition conservative Popular Party is widely predicted to score a landslide win.
The conservatives have given little detail of what they plan to do to reboot the economy. The party did, however, announce Tuesday it would present to Parliament by mid-January its proposal for a euro3,000 tax deduction for small- and medium-sized businesses and self-employed people who take on staff.
Small- and medium-sized businesses provide some 80 percent of Spain's jobs. Unemployment in the country now stands at a euro-zone high of 21.5 percent.
The party also promised it would reform Spain's labor law to make it cheaper to hire workers without making it cheaper to fire them.
Spain has seen its credit rating downgraded several times over the past year or so but has so far managed to avoid facing a full-blown debt crisis, like the ones that forced Greece, Ireland and Portugal into getting multibillion bailouts after they were effectively locked out of international bond markets.
Though Spain's annual borrowing levels are high, its overall debt burden remains relatively low and that has given the eurozone fourth largest economy a cushion, in contrast to Italy, which has become the epicenter of the debt crisis over the past week.
Agencies have cited Spain's weak economic prospects _ growth was flat in the third quarter _ and investors are getting skeptical about the deficit-reduction program.
The Socialist government's goal is for the budget deficit to fall to 6 percent of GDP at the end of the year, but hardly anyone thinks that is realistic with tax revenue so meager and outlays so hefty because of the sluggish economy. Spain is struggling to recover from the bursting of a real estate bubble that had largely fueled nearly a decade of solid growth.
The government blamed Tuesday's bad numbers on financial jitters around Europe and ruled out a rescue for the eurozone's fourth largest economy.
"Spain is not going to need a bailout," Secretary of State for European Union affairs Diego Lopez Garrido told reporters in Brussels. "Spain has a solid and solvent economy. Spain has done its homework. Spain, and the EU has recognized this, has done what it had to do. And whatever difficulties there may be _ yield increases, higher debt interest rates at auctions _ are due to a temporary situation of financial instability."
In Tuesday's auction, the Treasury sold euro3.2 billion ($4.4 billion) in 12- and 18-month bills, short of the euro3.5 billion maximum it had set. The interest rate on the 1-year bills was 5 percent, compared to 3.6 percent in the last such auction on Oct. 18. For the 18-month debt, the rate was 5.2 percent, up from 3.8 percent on that same day.
In the latest sign of anger over spending cuts, doctors at public hospitals in the northeast Catalonia region launched a two-day strike on Tuesday. And secondary school teachers in Madrid are to stage a walkout Thursday, their eighth since the school year began.
Ciaran Giles contributed to this report.