EU urges direct bank aid in boost for Spain

EU urges direct bank aid in boost for Spain

The European Commission advocated direct aid from a euro zone rescue fund to recapitalise distressed banks in a move that could eventually help Spain, the latest front in Europe’s debt wars, overcome a worsening banking crisis.

Spanish government borrowing costs earlier lurched higher and  investors rattled by fears about its financial sector fled to the relative haven of German bonds.

In a major economic policy document, the Commission said the vicious circle of weak banks and heavily indebted states lending to each other must be broken. While the Commission is responsible for proposing laws, it is the member states, most notably Germany and France, that decide whether or not to implement those proposals.

Commission President Jose Manuel Barroso told a news conference that tighter euro zone integration could include a banking union, a joint bank deposit guarantee scheme and euro area financial supervision, saying the mood had changed since member states only months ago unanimously rejected a joint deposit guarantee fund.

EU paymaster Germany has so far firmly opposed any collective European banking resolution and guarantee system and any use of bailout funds without a country having to submit to a politically humiliating EU/IMF austerity program.

Spain’s banking woes — the result of a burst property bubble aggravated by recession — have combined with growing uncertainty about Greece's survival in the euro zone to reignite Europe's sovereign debt crisis. That drove the euro to a two-year low below $1.2450 on Wednesday, while European shares also fell after Italy had to pay heavily to sell bonds.

Madrid said its bank rescue fund would issue bonds to inject funds into nationalised lender Bankia, but that looks expensive with 10-year borrowing costs at 6.67 per cent near their euro era peak and close to levels at which Ireland and Greece sought international bail-outs.

The Economy Ministry played down a Financial Times report that the European Central Bank had rejected an initial plan to rescue Bankia, Spain's fourth biggest bank, by stuffing it with government bonds that could be used as collateral to borrow from the ECB.
“Spain did not formulate any proposal to the ECB on funding the Bankia plan, so it was difficult for it to have an opinion,” a ministry spokeswoman told Reuters. “The Economy Ministry maintains as a first option to go to the markets to recapitalize the entity.”

Investors unnerved by Spain’s deepening financial crunch pushed Italy’s funding costs sharply higher at a bond sale, with 10-year yields topping 6 per cent for the first time this year.

A sudden economic deterioration in Europe would pose a serious threat to the US economy and hence to President Barack Obama’s re-election prospects in November.
Spanish Prime Minister Mariano Rajoy has insisted the government has no intention of seeking an EU/IMF bailout either for its banks or for the state. Highlighting Spain’s difficulty in meeting fiscal targets while gripped by a worse-than-forecast recession, the outgoing central bank chief said tax revenue may fall short of government estimates and spending may be higher than expected.

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