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Spain pays lower interest rates in debt auction

Ciaran Giles, Associated Press

Public transport workers demonstrate during a partial national rail strike in Barcelona, Spain, Monday Sept. 17, 2012. Hundreds of Spanish train services have been canceled as rail and subway workers staged strikes to protest wage cuts and reforms. State rail company RENFE said Monday it had canceled some 300 high-speed and intercity trains. It said minimum services agreed with labor unions meant that more than 50 percent of trains would run throughout the day. The banner reads in Spanish "No more cutting budgets, transport of Barcelona struggling". (AP Photo/Emilio Morenatti)

MADRID (AP) -- The level of bad debt at Spain's banks has risen to record levels, official data revealed Tuesday as investors continued to press the country's government to tap the European Central Bank's bond-buying program.

The Bank of Spain bank reported that the country's banks in July had €170 billion ($221 billion) in loans that are at risk of not being paid, representing 9.86 percent of their total loans. The bank said that the proportion of non-performing loans in July was up from 9.42 percent in June.

Many of Spain's banks are loaded with soured real estate investments following the collapse of the country's property market in 2008. The 16 other countries that use the euro last month agreed to provide Spain with up to €100 billion to help support these banks. Results of a complete stress test of the sector are due to be made known Sept. 28.

Spain has been under pressure to seek further help as it attempts to contain problems in the financial sector and among its heavily indebted regional governments.

The recession-hit country's borrowing costs have fallen from unsustainable highs in recent months after it said it may apply for international aid — if the conditions are reasonable — and after the European Central Bank said it would buy unlimited amounts of short-term government bonds to help countries like Spain.

The rate for Spain's benchmark 10-year bonds on the secondary market dropped from over 7.5 percent in July to 5.5 percent last week, signaling a big increase in investor confidence.

But the 10-year rate has since edged back up towards 6 percent this week amid investor concern that Prime Minister Mariano Rajoy is needlessly delaying a decision on demanding a bailout.

Also Tuesday, Spain raised €4.5 billion in short-term debt auctions at sharply lower interest rates. The Treasury said it sold €3.5 billion in 12-month bills at an average interest rate of 2.84 percent, down from 3.07 percent in the last such auction Aug. 21. It sold €1.01 million in 18-month bills at a yield of 3.07 percent, down from 3.35 percent.

Demand was more than double the amount offered in the 12-month bills and more than three times for the 18-month bills.

Spain's Treasury will test investor confidence again Thursday when it plans to sell up to €4.5 billion in three- and 10-year bonds.