If confirmed by official figures to be released in a week’s time, the Bank of Spain’s initial estimate would be the weakest outturn since the second quarter of 2009. Reuters

By Oliver Tree and Mike Obel

Spanish consumers are pulling cash out of banks at record levels, it was revealed on Tuesday.

Private sector deposits fell by nearly 5 percent in July to €1.509, European Central Bank data showed, as public confidence in the banking system continued to plummet amid a worsening economic situation.

The news comes after bond markets continued to hammer debt ridden euro zone nations Spain and Italy last week.

On Friday the interest rate on a 10-year loan to the Spanish government briefly topped 6 percent -- a level that forced Greece into a default earlier this year, despite a massive financial support from international sources -- before settling back to 5.96 percent.

"The pick-up in yields is a clear negative headline for Spain," Jo Tomkins, an analyst at 4Cast,a consulting firm, told the New York Times. "The country is facing a double-whammy of low growth and tough austerity, and doubts that it will be able to hit already optimistic deficit targets."

The surge in bond yields was followed by a two-notch credit downgrade by Standard & Poor's, which slashed the country's rating to BBB + on worries about the government's exposure to the nation's ailing banks. The current reduced rating is still considered investment grade.

The yield on Spain's two-year notes surged to the highest level in 18 years, Bloomberg News said.

Meanwhile, Spanish unemployment climbed to 24.4 percent of the workforce, the government said.

Italy's cost of borrowing was close behind its western neighbor: the yield on a 10-year note rose Friday to 5.84 percent from 5.24 percent.

"These ... results certainly came at a price which, in turn, leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable," Richard McGuire, senior fixed income strategist at Rabobank, told the Wall Street Journal.