By Paul Day and Noah Barkin
MADRID/LISBON (Reuters) - Spain attracted solid demand at a bond sale on Wednesday, easing concerns it could be swept up by the contagion hitting other euro zone states, but worries about Greek debt continued to haunt the bloc.
In a reminder of the rising political obstacles to solving the euro zone's debt crisis, a member of German Chancellor Angela Merkel's party said he would try to block plans to create a new financial safety net for the 17-nation currency area.
That threat came days after an anti-euro party scored strong gains in a Finnish election, stoking fears about a veto of Portugal's pending bailout.
Rising expectations that Greece will have to restructure its 325 billion euro ($468 billion) mountain of debt have weighed on the bloc in recent days, raising doubts about whether policymakers can restore confidence in their bold 12-year-old currency experiment.
The cost of insuring Greek five-year government debt shot up to a record high amid worries it could end up forcing "haircuts," or losses, on the holders of its debt to reduce its burden.
Madrid's debt sale temporarily alleviated another of European leaders' worst fears -- that Spain, with an economy roughly twice as big as those of Greece, Ireland and Portugal combined, could become the next target for investors, stretching the bloc's rescue funds to the breaking point.
NOT QUITE OUT OF THE WOODS
Spain's Treasury sold 3.4 billion euros of bonds maturing in 2021 and 2024 on Wednesday, near the top end of their target range.
Average yields on the 10-year bond rose to 5.472 percent from 5.162 percent in the last auction, reflecting the recent rise in Spanish long-term rates in the secondary market due to Greek restructuring jitters.
But demand was solid, outstripping what was on offer by 2.1 times, up from 1.8 previously.
"Spain is not completely disconnected from the concerns about the periphery but in a yield-hungry world there are plenty of investors that want to lock in these relatively attractive yields," said Marc Ostwald, a strategist at Monument Securities.
The euro, helped by expectations of further interest rate hikes by the European Central Bank, pushed up to a 15-month high against the dollar after the Spanish auction, which coincided with debt sales in Germany and Portugal.
An auction of 4.74 billion euros in new five-year German bonds went smoothly and Lisbon, which is in the midst of talks with EU and IMF officials on an 80 billion euro rescue, saw yields rise in a 1 billion euro treasury bill sale.
Although worries about debt sustainability in Greece are at the top of market concerns at the moment, political threats to the bloc's financial rescues are also increasingly on the radar screen of investors.
Opposition to further aid is particularly acute in northern Europe, where many taxpayers are furious at the prospect of helping southern countries that mismanaged their economies and finances for years, despite profiting from lower interest rates afforded by the single currency.
GERMAN ESM THREAT
In an interview with the Mitteldeutsche Zeitung newspaper published on Wednesday, a budget policy expert who represents Merkel's Christian Democrats (CDU) in the German parliament, vowed to vote against plans to create a new 500 billion euro rescue fund -- the European Stability Mechanism -- from 2013.
Klaus-Peter Willsch said dozens of his fellow deputies shared his views and held out hope that they could block the fund. Merkel's coalition has 331 seats in the 622-seat parliament, but opposition parties have been broadly supportive of her crisis-fighting efforts.
"I believe it can't be ruled out that the coalition fails to get the majority needed," Willsch said.
"We're on a slippery slope and we'll be slipping further and further if we don't stop this process," he added, referring to bailouts of Greece and Ireland, and a looming deal for Portugal.
On Sunday, the anti-euro True Finns party scored big gains in an election in Finland and immediately promised to block the Portuguese deal, although the likely next prime minister played down any prospect of that.
The surge in public anger at bailouts has put European leaders in a difficult position.
To avoid a near-term restructuring of Greek debt, Athens is likely to require more help from its European partners. Politicians like Merkel may find it difficult to approve that aid if their citizens are clearly against it.
"If the Finnish election result is any kind of portent of things to come in the core countries, it is worrying," said David Mackie, an economist at J.P. Morgan.
"For Greece to avoid an involuntary restructuring of its market debt, not only does Greece have to put in a lot of hard work, but in addition the rest of the region has to be pretty generous too. It looks increasingly challenging for the rest of the region to deliver the kind of fiscal transfers that are necessary."
(Additional reporting by Andrei Khalip and Shrikesh Laxmidas in Lisbon, Erik Kirschbaum in Berlin, Harry Papachristou in Athens, writing by Noah Barkin, editing by Mike Peacock)