Spain will consider seeking a bailout if the conditions imposedare acceptable, Deputy Prime Minister Soraya Saenz de Santamariasaid as loan defaults at Spanish banks climbed and lendingdropped.

Bad loans in the country's banking system rose to a record 9.86percent in July and lending fell 4.53 percent from the year-earlierperiod, the Madrid-based Bank of Spain said today. Spain sold 4.6billion euros ($6 billion) of 12- and 18-month bills with the1-year notes yielding 2.835 percent, compared with 3.07 percentwhen they were last auctioned on Aug. 21.

“If we manage to bring those borrowing costs down to acceptablelevels and that doesn't imply an intolerable sacrifice forSpaniards, we will have to analyze it,” Saenz said today in aninterview with Telecinco. “If we get our borrowing costs to fall,so we pay less, and if we manage to do that by doing reforms andwithout new sacrifices,” a rescue may be an option.

Rising bond yields may force Prime Minister Mariano Rajoy's handbecause investors would prefer Spain to seek a rescue, EuropeanCentral Bank Governing Council member Luc Coene said in Londonyesterday. The impact of ECB President Mario Draghi's proposal tobuy bonds of countries that submit to rescue programs isdissipating as Rajoy mulls triggering the aid. Ten-year yieldsreturned to more than 6 percent yesterday.

If “markets see that Spain will not” ask for aid, “then it willnot last long before spreads will rise again, and then Spain willbe somewhat forced to come back on its decision and submit to theconditionality program,” said Coene, who is governor of the Belgiancentral bank.

Economy Minister Luis de Guindos is preparing a package ofreforms for the end of the month aimed at boosting growth andbolstering confidence. He told euro-region finance ministers lastweek Spain is also ready to impose more budget cuts if they areneeded to meet its deficit commitments.

On Sept. 20, Spain will sell as much as 4.5 billion euros of itsbenchmark 10-year bond and securities due in October 2015. TheTreasury said Sept. 6 it had sold 76.8 percent of the medium- andlong-term debt it plans to sell this year. It hasn't given data onthe progress of bill sales.

The Treasury said demand for the 12-month bills was 2.03 timesthe amount sold, compared with 1.91 last month, and 3.56 for thelonger-dated bills, compared with 3.98. The yield on the 18-monthnotes fell to 3.072 percent, compared with 3.335 percent inAugust.

Spanish 10-year bond yields climbed past 6 percent yesterday forthe first time since Sept. 7, the day after Draghi said policymakers agreed to an unlimited debt-purchase program to regaincontrol of interest rates in the euro area. The bonds rose for thefirst session in four today with the yield falling three basispoints 5.94 percent at 12:20 a.m. in Madrid.

“Paying these interest costs is like throwing money out of thewindow,” Saenz said.

Bloomberg News