MADRID Spain's high borrowing costs mean it is effectively shut out of the bond market and the European Union should help Madrid recapitalize its debt-laden banks, Treasury minister Cristobal Montoro said on Tuesday.
Spain will test the market on Thursday with an issue of up to 2 billion euros ($2.5 billion) in medium- and long-term bonds at auction, leaving analysts perplexed about the timing of his remarks.
"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."
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 premium investors demand to hold Spanish 10-year debt rather than the German equivalent hit a euro era high of 548 basis points on Friday, on concerns that Spain's fragile banking system and heavily indebted regions will eventually force it to seek a Greek-style bailout.
The euro fell to a session low against the dollar and Bund futures rose in response to Montoro's assessment. However, Spain's stock market was up on the day and 10-year Spanish yields were steady below 6.4 percent.
"The market is quite nervous still, these remarks will make the auction more difficult," said Emile Cardon, market economist at Rabobank.
Prime Minister Rajoy has also voiced concern that Spain cannot continue to finance itself indefinitely on the market at such high borrowing costs.
He has repeatedly called for urgent action, which is understood to be aimed at the European Central Bank to revive its bond-buying program or inject more liquidity into the financial system.
Spain is pressing for a direct European rescue for its banks, without the government having to go through he humiliation of asking for help, but Germany has appeared to rule out such a "bailout lite" for the euro zone's fourth biggest economy.
Finance chiefs of the Group of Seven leading industrialized powers held emergency talks on the euro zone debt crisis on Tuesday, with Spain being one of the main concerns.
EU AID FOR BANKS
Spain still needs to refinance about 82 billion euros of debt this year, while helping its regions to repay maturing debts of about 16 billion euros in the second half of 2012.
The Treasury, which took advantage of favorable funding conditions in the first months of the year after the ECB injected about 1 trillion euros of cheap money into European banks, holds 44 billion euros in cash and can meet its financial obligations for a few months.
But this strong liquidity position could dwindle quickly if market sentiment gets worse and the bill to recapitalize troubled banks soars further.
The government is set to inject 19 billion euros in to nationalized lender Bankia and will soon get the results of an independent audit of its banking sector which will determine how much more is needed for other banks.
Montoro said he did not expect the sum to recapitalize its banks to be too large and insisted that neither Germany nor France had pushed Spain to seek an international rescue.
Emilio Botin, chairman of the nation's biggest bank, Banco Santander told Reuters Spanish banks needed about 40 billion euros in additional capital,
"We're not talking about astronomical sums, unattainable. The figures are perfectly accessible," Montoro said, also calling for a bloc-wide banking union.
German Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would discuss with EU authorities the idea of putting systemically important cross-border banks under European supervision. But Berlin is resisting the idea of a joint deposit guarantee for euro zone banks and a bank resolution fund.
Montoro said he hoped talks on the banking union would be completed by the June 28-29 EU summit.
(Reporting by Julien Toyer; Editing by Fiona Ortiz/Mike Peacock)