Spain's borrowing costs hit record after Moody's cut

Spain's borrowing costs have risen to a euro-era record, with lenders demanding a higher interest rate.

The yield on 10-year bonds rose to 6.854% on Thursday morning, a level which many analysts believe is unsustainable in the long term.

It came as Moody's cut Spain's credit rating to one notch above "junk" and ahead of an Italian bond auction.

At the weekend, Spain agreed a 100bn-euro ($126bn; £81bn) bailout of its banks by fellow eurozone countries.

It was hoped that the bailout would help calm fears in the financial markets about the strength of Spain's banks and ease Madrid's borrowing costs.

However, Moody's said the eurozone plan to help Spain's banks would increase the country's debt burden.

Moody's cut Spain's rating from A3 to Baa3 and said it could reduce this further within the next three months.

If Spain is cut to junk, some index-tracking investors would be forced to sell the country's bonds, adding to upward pressure on yields and pushing Spain's financing costs higher.

On Thursday, Italy will test market sentiment with the sale of up to 4.5bn euros of bonds.

Moody's also cut its credit rating for Cyprus by two notches, from Ba1 to Ba3.

Cypriot banks are heavily exposed to the troubled Greek banking system.

However, it is unclear whether the Cypriot government will seek a loan from its European partners or will instead turn to Russia, who already provided it with a 2.5bn-euro loan in December.