Spanish cabinet discusses budget

Spain's implied cost of borrowing remained above 7% on Friday as Prime Minister Mariano Rajoy prepared to discuss budget plans with his cabinet.

The government is also due to submit budget plans for 2013 and 2014 to the European Commission later on Friday.

Last month, Madrid announced additional spending cuts and tax rises worth 65bn euros ($79bn; £51bn).

There are fears that Spain's shrinking output and indebted banks could force it seek a financial rescue.

The yield on Spain's 10-year bonds was trading at 7.1% early on Friday.

If Spain's borrowing costs remain at this level for long periods of time it would make it unaffordable for the government to service its debts.

Greece, Portugal and Ireland all had to seek international bailouts when their borrowing costs hit similar levels.

Effectively, they had to ask the European Union and International Monetary Fund to lend them the money to pay their bills.

In June, Spain requested 100bn euros of loans from the EFSF bailout fund to help support its banks, which are struggling with bad debts from loans made in the property sector.

However, on Thursday, Mr Rajoy said he had not discussed making a request for a full financial bailout with Mario Monti during a visit by the his Italian counterpart.

But during a joint press conference, Mr Rajoy would not say whether he thought Spain would need to seek a full financial rescue.

Mr Rajoy is due to hold another press conference after a meeting with his cabinet later on Friday.

Mr Rajoy's cabinet is expected to discuss fresh spending cuts for next year and 2014.

These will be outlined in a plan due to be submitted to the European Commission later on Friday.

On Thursday, the president of the European Central Bank (ECB) Mario Draghi said the ECB was ready to intervene in the bond markets to bring down the cost of borrowing for countries such as Spain.

But he told reporters that Spain's formal request for help from the European bailout funds - the EFSF and ESM- was "a necessary condition" of any ECB support.

Eurozone members Germany and Finland oppose ECB support for Spain and Italy without promises from their governments to stick to strict spending and budget plans.

By making a formal request to the EFSF, Spain would have to sign a memorandum of understanding or legal promise to stick to agreed plans.