Spanish bonds fell for a fifth straight day after European Union leaders disagreed on extra funding to ease the region’s sovereign debt crisis and before auctions next week that may push the cost of borrowing higher. Spain’s 10-year losses widened the yield premium over German bunds, and Portuguese securities slid amid concern contagion is infecting banks across the region. European Central Bank Governing Council member Ewald Nowotny said emergency liquidity measures will have to be withdrawn as the economy strengthens. German bunds declined in the week. “We’ve got a lot of supply next week in Spain, and that’s making investors a little bit wary,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for money managers. “The market is looking for action there to tackle the banking problems, particularly the regional banks.” The yield on the Spanish 10-year bond rose 13 basis points to 5.44 percent at 5:25 p.m. in London, up from 5.08 percent on Dec. 3. The 4.85 percent securities maturing in October 2020 fell 0.925, or 9.25 euros per 1,000-euro ($1,320) face amount, to 95.59. That increased the yield premium investors demand for the bonds instead of benchmark German bunds to 244 basis points, the most in more than a week. Spain is due to sell bonds maturing in 2020 and 2025 on Dec. 16. The yield on similar-maturity Portuguese debt climbed 20 basis points to 6.49 percent and Irish yields added 11 basis points to 8.29 percent. Wider Spreads The cost to insure against losses on bonds of financial companies in Europe surged. Credit-default swaps on the Markit iTraxx Financial Index of banks’ and insurers’ subordinated debt jumped as much as 17 basis points to 337 basis points, the highest level since April 2009, according to JPMorgan Chase & Co. Moody’s Investors Service said yesterday it may downgrade 10 Portuguese banks. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments had the biggest two-day gain since June. The ECB said yesterday that some lenders in the euro area are “excessively reliant on central bank liquidity.” Governing Council member Mario Draghi said in a Financial Times interview that officials are discussing “concrete proposals” to deal with banks overtly reliant on ECB funding. Nowotny told reporters in Vienna today that “the extraordinary measures can’t become normality.” The central bank “certainly aims to continue the exit policy as far as the broader economic environment allows it,” he said. Irish Bank Funding International and domestic institutions in Ireland increased their reliance on ECB funding to 136.4 billion euros on Nov. 26, from 130 billion euros at the end of October, according to statistics published on the Irish central bank’s website today. The central bank updates the ECB funding position of domestic lenders at the end of every month. Spanish banks reduced their borrowings from the ECB in November, a Bank of Spain official said on Dec. 2. The liquidity situation that Spanish lenders have to contend with is “serious,” though not “dramatic,” said the official, who asked not to be identified, without giving a figure of the borrowings. Fitch Ratings, which said yesterday that ECB bond purchases may need to be increased to stem contagion from the sovereign- debt crisis, published a report today saying it expects negative bank-rating actions in the coming year “to be concentrated in peripheral euro-zone economies.” Draghi Comments Draghi, who is also Governor of the Bank of Italy, said in the FT interview that bond buying must not compromise the central bank’s independence. The ECB’s bond purchases were necessary to ensure the smooth functioning of markets. “I’m only too aware that we could easily cross the line and lose everything we have, lose independence, and basically violate the treaty” that set up the ECB, the newspaper cited Draghi as saying. The difference in yield, or spread, between German bonds and Spanish and Italian securities widened this week as policy makers set out their positions on the possibility of selling joint euro-region debt to help resolve the region’s financial crisis. With a European Union summit set for next week in Brussels, officials from Italy, Luxembourg, Belgium and Greece said the proposal should be explored, prompting resistance from Germany, France and Austria. French President Nicolas Sarkozy said today that “common bonds would make governments less responsible.” The bund yield rose two basis points to 2.96 percent today, and is up from 2.86 percent a week ago. To contact the reporter on this story: Paul Dobson in London at

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