Euro zone experts discussed a Finnish proposal for Spain and Italy to issue covered bonds to make their debt more attractive and to allow the euro zone's permanent bailout fund to bid at primary auctions of the two countries, officials said on Thursday, Reuters reported. The aim of the Eurogroup Working Group of deputy finance ministers and treasury officials is to find a way to lower financing costs for the two sovereigns that European Union leaders meeting in Brussels could discuss later.

The eurozone group of nations insisted Wednesday that the rescue loans for Spain’s troubled banks would be channeled through the national government, adding to its sovereign debt. Madrid had petitioned to have it paid directly to the banks to not raise concerns over its public debt, The Washington Post reported on an Associated Press story. A Eurogroup statement said the aid would be given to Spain’s bank restructuring fund, or FROB, and that the Spanish government would “remain fully liable” for it.

Moody's Investors Service lowered its long-term ratings on 28 Spanish banks by one to four notches, pointing to the reduced credit-worthiness of Spain and expectations that the banks' exposure to commercial real estate will likely cause higher losses, The Wall Street Journal reported. Spanish bank stocks tumbled Monday on speculation about the downgrades.

Spain on Monday will formally ask its eurozone partners for up to €100bn to recapitalise its banks, opening a week of diplomatic activity that will culminate in a European Union summit on Thursday night to address the region’s damaging sovereign debt crisis. Luis de Guindos, Spanish economy minister, and his colleagues in the 17-nation eurozone say details of the loan for Spain and the conditions attached should be agreed in a memorandum of understanding to be discussed by eurogroup ministers on July 9.

Spain said its crisis-hit banks will need as much as €62 billion ($78.75 billion) in new capital to absorb losses from a real-estate meltdown, as the International Monetary Fund warned that the euro-zone plan to aid the country may not work, The Wall Street Journal reported. Spanish lenders have been pummeled by a dive in property prices that hasn't yet bottomed out, as loans to households are going bad amid record-high unemployment.

The dismal market reaction to the euro zone's promise to pump as much as €100 billion ($125.75 billion) into shaky Spanish banks—underlined by the high yield the government paid on Tuesday to raise short-term funds—is prompting a rethinking of the rescue's mechanics, which have heightened worries over Madrid's ability to repay its debts, The Wall Street Journal reported.

The brief afterglow from Greece's vote Sunday to try to remain in the euro was quickly extinguished by a cascade of bad news out of Spain that again rattled faith in the currency bloc's ability to support its most troubled members, The Wall Street Journal reported. Fresh data from Spain's central bank showed the country's lenders were sitting on the highest level of bad loans in 18 years and that their deposits continued to leak away.

Spain's borrowing costs jumped to a record Thursday, fanning concerns that the €100 billion ($125 billion) aid package planned for its banks won't suffice to stave off a much larger bailout for the entire country, The Wall Street Journal reported. Spain agreed last weekend to a bank-recapitalization plan it hoped would restore investor confidence in the country's credit-worthiness. Instead, investors have continued to jettison Spanish debt amid concerns that the deal for as much as €100 billion in aid will saddle the government with more debt at a time of deepening economic malaise.

After clinching a $125 billion bailout for Spain’s banks, Prime Minister Mariano Rajoy flew to Poland on Sunday for the Spanish team’s soccer match, declaring “this matter is now resolved.” Not so fast, prime minister. On Tuesday, Spain’s long-term borrowing costs soared to their highest level since the country joined the euro zone. Investors have apparently concluded that the rescue is potentially a much better deal for the banks and their shareholders than for the government, its taxpayers and bondholders, the International Herald Tribune reported.

Spain’s Treasury on Monday vowed to continue as normal with sovereign bond auctions, arguing that the eurozone’s weekend agreement on a €100bn bailout for Spanish banks would underpin the country’s debt market, the Financial Times reported. Market analysts have expressed doubts as to whether the deal to recapitalise banks with a loan injection via Spain’s state Fund for Orderly Bank Restructuring will provide lasting benefits. On Monday morning Spanish bonds rallied, but the euphoria quickly faded.