Some regions have failed to pay public service contractors for months. The Spanish central government has offered credits to help pay those debts, on the condition that regions abide by their deficit goals. Despite rising financing costs, the source ruled out any possibility the country would need international aid. Markets are not being driven by the real situation in the country. Banks and the Treasury have their liquidity resolved, the source said. Soaring bond yields raise worries the government's borrowing costs could quickly reach unaffordable levels unless the European Central Bank resumes buying government bonds in a programme which has helped to keep yields down in recent months. We're back in full crisis mode, said Rabobank rate strategist Lyn Graham-Taylor. It is looking more and more likely that Spain is going to have some form of a bailout. Assuming there is not an (ECB) intervention you would not see a cap on Spanish yields, they would just keep increasing. Official data on total economic output in the first three months of this year is not due until April 30. However, Economy Minister Luis de Guindos said gross domestic product was likely to have fallen a similar amount to the October-December period of 2011 when the economy shrank 0.3 percent quarter-on-quarter. Two successive quarters of falling GDP mark a recession, which has been widely expected in Spain, but de Guindos said the downturn may not be as bad as first thought. At the moment I see a first quarter with a similar pattern to the last quarter of last year, de Guindos said in an interview. However, he added: If you had asked me two months ago, I would have expected the first quarter of 2012 to be much worse than the last quarter of last year. But that's not going to be the case. Spain's economy has been in shrinking or stagnating since a property bubble burst in 2008. With house prices still sliding, the survival of some banks and the ability of the new government to control its finances are in doubt. Lower Euribor interest rates, used to set most Spanish mortgages, had given some relief to cash-strapped consumers in a country plagued by massive unemployment, said de Guindos. The conservatives, who won elections last November on dissatisfaction with the previous Socialist government's handling of the economic crisis, have passed a number of measures to reduce one of the euro zone's highest deficits.
However, faith in Prime Minister Mariano Rajoy's ability to work within euro zone budget limits has been tested since he unilaterally eased the 2012 deficit target at the beginning of March, prompting debt risk premiums to rise sharply.