THAT'S NOT GOOD:

The European interbank market is not lending to smaller Spanish banks partly due to concerns the country could be heading for a debt crisis along the lines of EU partner Greece, an international bank source said on Wednesday.

The restrictions did not appear to be aimed at specific institutions so much as the country, the source said, and market access could ease if Spain's Socialist government announces further austerity measures.

Another source cited by Cinco Dias paper said the bigger Spanish banks appeared to be fine.

"Only the biggest Spanish banks are managing to get funding, but backed by bonds from other countries such as Germany. With our national bonds they are not managing to get anything," an executive at a Spanish savings bank was quoted as saying.

There have been signs for some weeks that Spanish banks were having to pay a premium to borrow in their domestic repo market as the broad repricing of euro zone sovereign credit risk raised lenders' concerns over the liquidity of the banking sector.

A credit analyst source told Reuters the issue was not one of liquidity, as the banks have the ECB to rely on, but that it shows that in the current risk-averse climate smaller banks are being ostracised.

"The markets are almost shut for Spain," the international banking source said.

Meanwhile, labor reform talks between the administration, unions and business ended in stalemate.