Spain issues stark debt warning ahead of EU summit
Mariano Rajoy - Photo EU Council
(MADRID) - Spain cannot finance itself for long at the high rates it now pays on the markets, Prime Minister Mariano Rajoy warned Wednesday on the eve of a European Union summit.
If Spain, the eurozone's fourth biggest economy, is shut out of the markets it could lead to a full-blown bailout for the country with unfathomable consequences for the 17-nation eurozone.
"The most urgent subject is the subject of financing," Rajoy told parliament.
"We cannot finance ourselves for a long time at prices like those we are now paying," he said. By late afternoon, the yield on Spanish government 10-year bonds had surged above 6.9 percent.
Rajoy's message served as a blunt warning to his EU partners to take actions to reassure markets and bring down the punitive rates that Spain, Italy and other fragile eurozone economies must pay to finance themselves.
"There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries," he said.
Investors are deeply concerned over Spain's banking sector, which has been thrown a 100-billion-euro ($125 billion) rescue loan by the eurozone to fix balance sheets heavily exposed to the collapsed real estate sector.
But markets also are sceptical of Spain's targets of slashing the public deficit during a recession with unemployment at 24.4 percent -- the highest in the industrialised world.
That recession is deepening, the Bank of Spain warned.
After economic output shrank by 0.3 percent in the last quarter of 2011 and again in the first quarter of 2012, latest data showed further contraction in the second quarter "at a more intense pace", it said.
Investors fear Spain, whose public debt would actually increase because of the banking loan, could be forced to seek a state bailout, going the same way as Ireland, Greece and Portugal before it.
But Spain's economy is twice the size of those three eurozone victims combined, and if it falls many analysts fear the eurozone itself would be in peril.
Even the IMF has said it doubts Spain can meet its goal of slashing the deficit to from 8.9 percent of economic output last year to 5.3 percent this year and 3.0 percent in 2013.
Rajoy said he would press his European partners to agree to "greater European integration," including for fiscal and banking union among the eurozone partners.
But calls by Spain, Italy, France and other nations for a pooling of eurozone debt in the shape of eurozone bonds to relieve market pressure have met stiff opposition from German Chancellor Angela Merkel.
In the run-up to the summit's opening on Thursday, she even appeared to harden her line, dismissing eurobonds and similar schmes as "wrong and counterproductive".
Berlin is unwilling to consider what Merkel termed "easy" solutions to the debt crisis -- such as eurobonds -- that it believes do not strike at the heart of the problem: lax fiscal discipline and insufficiently centralised EU control.
The summit is likely to agree on a "growth pact" with measures worth around 130 billion euros as well as a plan towards closer union that will hand the EU the final say over national budgets in the eurozone as well as a banking union.
Rajoy's warning could also be directed at the European Central Bank, which intervened on bond markets before when Spanish and Italian rates reached such unsustainable levels, but has stood on the sidelines for months.
The Spanish leader called for steps to calm the markets "using the instruments at our disposition", but the ECB has said it is up to EU governments to fix the root problems.