Spain says markets closing on it, seeks help for banks

MADRID/TOKYO Tue Jun 5, 2012 7:02pm EDT

1 of 3. Spain's Treasury and Public Administration Minister Cristobal Montoro listens to a question during a news conference after a cabinet meeting at Moncloa palace in Madrid June 1, 2012.

Credit: Reuters/Andrea Comas

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MADRID/TOKYO (Reuters) - Spain said on Tuesday it was losing access to credit markets and Europe should help revive its banks, as finance chiefs of the Group of Seven major economies conferred on the currency bloc's worsening debt crisis but took no joint action.

Treasury Minister Cristobal Montoro sent out a dramatic distress signal about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively off limits to Spain.

"The risk premium says Spain doesn't have the market door open," Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.

Spain is beset by bank debts triggered by the bursting of a real estate bubble, aggravated by overspending by its autonomous regions. The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to take a Greek-style bailout.

Montoro said Spanish banks should be recapitalized through European mechanisms, departing from the previous government line that Spain could raise the money on its own.

The European Union's top economic official, Olli Rehn, said Madrid had not requested EU assistance but other sources said a lot hinges on an independent audit of the capital needs of Spanish banks, which is due to report soon.

Sources in Berlin and Brussels denied a report in German newspaper Die Welt that European officials were considering offering Spain a precautionary credit line via the bloc's rescue fund by mid-June.

Two Spanish government sources had said earlier that Madrid neither needed or wanted such a line.

"Nothing is being prepared, nothing has been asked for," a senior euro zone source told Reuters.

Another euro zone source pointed to the Spanish bank audit as the next pivotal moment. One option being discussed in some euro zone capitals was for money to be handed to the Spanish bank rescue fund FROB to avoid the government having the stigma of asking for aid, a third source said.

Montoro's comments on Spain's borrowing sent the euro down after the 17-nation European currency earlier hit a one-week high against the dollar on hopes that a conference call of G7 finance ministers and central bankers might hasten action.

The U.S. Treasury, which chaired that meeting, said in a statement that the G7 discussed "progress towards a financial and fiscal union in Europe" and agreed to monitor developments closely. But the group made no joint statement and took no immediate steps.

White House economic adviser Michael Froman said the EU had done a lot to address its debt problems but more action was required to reduce market anxieties.

"Europe has taken a number of very important steps in the last months to address the crisis," Froman told a panel at the CSIS think-tank. "It's clear now from the markets that they expect more, and more is needed."

Japanese Finance Minister Jun Azumi said the G7 finance chiefs agreed to work together to deal with the problems facing Spain and Greece, where elections later this month could push Athens closer to the euro exit door.

"I see market anxiety over world economy largely stemming from Europe's problems," Azumi told reporters in Tokyo.

"BIGGER SOLUTION"

European leaders, alarmed by the latest turn of events, have begun thinking seriously about the economic union needed to make the single currency project secure. But that end-game is months or years away.

"What we have learnt since the weekend is that all the talk about a bigger solution, a bigger response from the politicians is gaining some steam," said Rainer Guntermann, strategist at Commerzbank in Frankfurt. "At the same time it doesn't look like they have a quick fix at hand, not a fundamental game changer at this point in time."

One senior European G7 source, speaking just before the teleconference, said it was set to turn into a "Germany-bashing session", with other partners applying severe pressure on Berlin to do more to stimulate growth and help the euro zone.

The source, who requested anonymity due to the confidential nature of the call, confirmed that Germany was pushing Spain to accept international aid, as Greece, Ireland and Portugal have done, to help it recapitalize stricken banks.

"They don't want to. They are too proud. It's fatal hubris," the source said of the Spanish government.

Berlin and the European Central Bank have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.

French Foreign Minister Laurent Fabius said Europe must find a solution to the Spanish banking crisis that did not add to Madrid's already heavy budget deficit.

The ECB holds its monthly rate-setting meeting on Wednesday and European Union leaders meet on June 28-29 to discuss a strategy for overcoming the crisis, which began in late 2009 when Greece revealed it had covered up a huge budget deficit.

MOUNTING CONCERN

Emilio Botin, chairman of Spain's biggest bank, Banco Santander told Reuters Spanish banks needed about 40 billion euros in additional capital.

Montoro said the bank recapitalization figures were "perfectly accessible" but analysts were perplexed about his comments on Spain's ability to raise debt.

Spain will test the market on Thursday by issuing up to 2 billion euros ($2.5 billion) in medium- and long-term bonds at auction.

His comments appeared aimed at pressuring the ECB and EU paymaster Germany to find ways of helping. But the central bank has so far shunned calls to resume purchases of Spanish government bonds, and Berlin has rejected allowing direct aid from the euro zone's rescue fund to recapitalize Spanish banks without setting conditions for the government.

The festering euro zone crisis has sparked mounting concern outside Europe. On Monday, a G7 source said fears that capital flight from Spain could escalate into a full-fledged bank run had triggered the emergency conference call.

Pressure is building in particular on Germany, the biggest contributor to euro zone rescue funds, to back away from its prescription of fiscal austerity for the region's weaker economies and to work harder on fostering growth.

Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.

Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would consider the idea of putting systemically important cross-border banks under European supervision.

However, Berlin is so far resisting a joint deposit guarantee for euro zone banks and a bank resolution fund, both of which would create new liabilities for German taxpayers.

A German government strategy paper seen by Reuters showed Berlin does not expect final decisions on strengthening economic policy coordination until March 2013, with only a roadmap being agreed at this month's summit.

(Additional reporting by Jan Strupczewski in Brussels, Annika Breidthardt, Noah Barkin and Andreas Rinke in Berlin, Stella Dawson and Matt Spetalnik in Washington, Ana Flor and Alvaro Soto in Brazil, Fiona Ortiz in Madrid. Writing by Paul Taylor, editing by Mike Peacock)

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