A bailout of Spanish banks agreed at the weekend won't necessarily make it cheaper for the country to borrow on government bond markets, meaning Madrid may need to seek further international financial help.
With the loans potentially increasing Spain's debt by up to 100 billion euros ($125 billion) and possibly ranking ahead of regular government debt in the queue for repayment, the sovereign's already elevated borrowing costs could come under more pressure to rise than fall.
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"The higher debt level implies that in the future it will be more difficult to keep the government debt stable, which will put upward pressure on funding costs," said Michael Leister, rate strategist at DZ Bank in Frankfurt.
The Spanish Treasury said on Monday it would continue to tap debt markets with regular auctions after euro zone finance ministers agreed on Saturday to lend up to 100 billion euros to prop up banks laden with bad debt from a burst property bubble.
Spanish yields initially fell sharply on Monday as markets welcomed the deal, of which many key details are still unclear. Spain has a lower level of sovereign debt relative to the size of its economy than, for example, Italy.
However, the fall in yields reversed after a German finance ministry spokesman said Spain was more likely to tap the euro zone's new permanent bailout facility, the European Stability Mechanism (ESM), than the existing European Financial Stability Facility (EFSF).
Loans from the ESM would be senior to Spanish government bonds and therefore more likely to be repaid in the event of a default, analysts said, potentially making private investors wary of buying the sovereign debt.
Spanish 10-year yields last stood at 6.396 percent, up 15 basis points on the day.
"I wouldn't exclude borrowing costs hitting the 6.5 or 7 percent level again in the near future," Leister said.
Borrowing at such rates might be possible for two quarters, he said. "But as we have seen with Ireland, Portugal and Greece, governments understand this is not a cure to fix their problems and that it is more sustainable and more efficient to request a bailout."
Spain still needs to borrow 37 billion euros of the 86 billion it plans to raise in debt markets this year. It frontloaded borrowing in the early months of 2012 when domestic banks, the main buyers of the government's debt, were flush with cheap loans from the European Central Bank.
However, the pace has slowed, with Spain generally borrowing smaller amounts than earlier in the year. On Thursday, Spain paid 6.044 percent to borrow over 10 years, the highest at an auction since 1998, before the euro was launched. Germany, seen as the safest borrower in the euro zone, paid 1.47 percent on a 10-year bond in mid-May.
Ciaran O'Hagan, strategist at Societe Generale in Paris, said the bank rescue was a "palliative" and that Spanish borrowing costs could rise because the package was not enough to guarantee Spain market access at affordable levels.
"We will continue to trade around these levels until new news comes out and the news that's most likely to lead to sharp market moves would be from outside of Spain," O'Hagan said, pointing to Sunday's Greek election as an obvious trigger.
The poll could decide whether Greece stays in the euro zone ands, if parties opposed to the country's bailout win, could drive bond yields higher across the currency bloc's periphery.
However, not everyone saw Spain struggling to borrow after the bank rescue. Lloyds Bank strategist Achilleas Georgolopoulos said the deal had removed a lot of uncertainty and that 10-year borrowing costs could gradually fall to 5.5 percent.
The Greek result might push up Spain's borrowing costs could but the deal on Spanish banks could be "a barrier against extreme moves".
He said the banks might not need the full 100 billion and taking 60-70 billion would only raise Spain's debt to GDP ratio to levels similar to those of France and Britain.
"At the moment, we don't see the extreme risk of Spain not being able to fund from the market," he said.