Spain’s borrowing costs surged in a short-term debt auction yesterday as investors fretted about Spanish banks’ vast exposure to the collapsed property sector.

The Treasury raised €2.526 billion in an auction of three- and six-month notes, with investor demand outstripping supply by more than four-to-one, Bank of Spain figures showed.

But the state had to pay significantly higher rates to lure buyers at a time of deep uncertainty over the extent of the banks’ bad loans and whether the state may have to go deeper into debt to help them out.

Compared to a similar auction on April 24, the rate rose to 0.846 per cent from 0.634 per cent for three-month notes and to 1.737 per cent from 1.580 per cent for six-month notes.

The high rates attracted such strong demand that the Treasury beat its target of raising €1.5 to €2.5 billion. Spanish financial markets have been depressed by concerns about the banks, which had problematic assets of €184 billion at the end of 2011, equal to 60 per cent of their property portfolio.

Economy Minister Luis de Guindos insisted that no external help is needed for the banks, 10 days after he instructed banks to set aside an extra €30 billion in 2012 in case property-related loans go bad.

That was on top of €53.8 billion in provisions required under reforms enacted in February.