Spain had to pay higher yields to raise €3.354 billion in a bond auction yesterday in a climate of heightened concern over eurozone debts after a bailout deal for Portugal.

Spain has been caught up in new fears over sovereign debt levels, propelled by the problems in neighbour Portugal, which on Tuesday became the third eurozone country to do a debt-rescue deal with the European Union and IMF.

Higher yields are costly to Spain, whose central and regional governments and banks need to raise about €290 billion in gross debt including rollovers in 2011, according to Moody’s ratings agency.

In the latest issue, the Treasury was forced to pay an average interest rate of 4.549 per cent to raise €3.354 billion in five-year bonds, up from 4.389 per cent in the last such issue on March 3 and from 4.523 per cent at Wednesday’s close.

But demand was strong at €6.2 billion, allowing the Treasury to stay within its target range of €3 to €4 billion.

The Madrid stock market fell 0.50 per cent following the news.

Spain, where the economy is the size of the Greek, Irish and Portuguese economies combined, has been battling to convince markets that it should not be lumped together with the three lame ducks now under EU and IMF rescue terms.

The Spanish authorities have enacted reforms to strengthen bank balance sheets, cut state spending, make it easier to hire and fire workers, lower the retirement age and sell off assets.

Prime Minister José Luis Rodriguez Zapatero has vowed to bring the country’s annual public deficit below an EU ceiling of three per cent of gross domestic product in 2013.

The public deficit hit 11.1 per cent of GDP in 2009, the third-highest in the eurozone after Greece and Ireland, before falling to 9.24 per cent last year.

The economy is struggling with an unemployment rate that soared to 21.29 per cent in the first quarter, the highest in the industrialised world.