Spain’s shaky banks, the country’s indebted regional governments and Madrid’s plans for helping them have pushed up its borrowing costs to unsustainable levels.
Spain reportedly plans to issue new government bonds to raise the money it needs. That would increase its debts, which are already causing concern to the financial markets and European officials.
The amount of interest Spain is having to offer to get investors to buy its bonds that mature in 10 years time is near 6.5 percent, perilously close to the levels that led to bailouts in Greece, Portugal and Ireland.
Investment banker Enrique Quemadan of One to One Capital Partners in Madrid said borrowing cost have rocketed due to fears about Spain’s financial system but the government is forcing financial institutions to do what they should have done four years ago.
He added: “In 2008, the US and British governments fixed the financial systems there by injecting public money into banks. Now finally Spain’s doing the same, banks are being nationalised, which is positive, but we have a shock from the impact we should have had years ago.”
Bankia is the most troubled. In 2011 it announced the second biggest banking loss in Spanish history – despite paying its top bosses 22 million euros.
But how much of a mess the others are in will not be known until audits are completed next month.
Spain has insisted it does not need external funds to bail out its banks despite the dire state of the economy.
Prime Minister Rajoy said on Monday: “There will not be any (European) rescue for the Spanish banking system. Our problem is the accumulated monumental debt we Spaniards have at this time and it’s that debt that we have to refinance, which is difficult at this time.”
Brussels would have to approve whatever Madrid does to help the banks and the regions. On Tuesday the European Commission said it has not received details of what the Spanish government intends to do.
Spain has been hoping the European Central Bank would help by restarting its dormant bond-buying programme or with more long-term loans to banks
But ECB policymaker Ewald Nowotny said on Tuesday that had not been discussed and it was up to national governments to rescue their banks.