Merket either gets her act in gear or Spain goes down. And if Spain goes down, the world is in a heap of trouble.
Spain Warns Market Access Being Shut, Calls For EU Action On Bank Recap
-- Minister says markets shut for Spain at current borrowing costs
--Minister calls for European institutions to move for a bank recapitalization plan
-- Spain bailout unfeasible, also not needed, minister says
-- G-7 discuss European fiscal, financial union process
-- German lawmaker, Dutch PM oppose ESM lending directly to banks
(Updates with details from G-7 call, comments from German lawmaker, Dutch caretaker prime minister)
By David Roman
MADRID--Spain Tuesday urged euro-zone partners to act faster to help support its enfeebled banks, with Budget Minister Cristobal Montoro saying that the government has effectively lost access to capital markets because of steep risk premiums demanded by sovereign bond investors.
In making this dramatic admission, Mr. Montoro joined recent calls by the Spanish government for direct aid from European Union institutions for Spanish banks as the government hopes to avoid a full-blown bailout package. The matter has gained urgency after Madrid was forced into a EUR19 billion euro rescue of lender Bankia SA (BKIA.MC) and as the government's borrowing costs have surged to record highs. Yields on Spanish 10-year bonds were above the 6% mark for the third straight week and at late in Europe, the yield was at 6.26%. By comparison, the yield on the German 10-year bond, considered a haven for investors, was at 1.20%.
"What this premium tells us is that the State, and Spain as a whole, has a problem when it comes to accessing markets, when we need to refinance our debt," Mr. Montoro said in a radio interview. "What that premium says is that Spain doesn't have the market's door open, as such, the challenge is to open that door and regain the confidence of those markets, our creditors."
Speaking later Tuesday in parliament, Spain's Prime Minister Mariano Rajoy said that the European Union needs to quell doubts on the euro's project by reinforcing integration and creating a common banking union and euro-zone bonds. Mr. Rajoy said that Spain plans to continue an ambitious reform drive, but EU partners must also do their part to improve the situation.
The warning from Madrid is reminiscent of similar alarms over prohibitive borrowing costs sounded by Greece, Portugal and Ireland before entering into bailout talks with such international lenders as the European Union and the International Monetary Fund.
It also came as finance chiefs from the Group of Seven leading industrialized nations Tuesday discussed Europe's financial crisis and potential responses amid concerns that the continent isn't moving fast enough to contain its problems.
A U.S. Treasury official said that the talks, among G-7 finance ministers and central bankers, at Tuesday's teleconference included "progress toward financial and fiscal union in Europe." This plan has been gaining traction recently but may not be in place in time to address Spain's urgent funding needs.
Mr. Montoro indicated Europe should move swiftly to allow its institutions to directly recapitalize banks, stressing that a wider rescue plan is an unfeasible and unnecessary option for the euro zone's fourth-largest economy.
"Spain can't really be bailed out, from a technical point of view," Mr. Montoro said.
He said Spain's banks don't need "huge" amounts of aid, backing up comments made by the influential Chairman of Banco Santander SA (STD), Emilio Botin, who said on Monday that 40 billion euros should be enough to make Spain's financial sector viable. Some analysts have put estimates for Spain's banking sector needs to as high as EUR90 billion.
"The amount needed by Spain's banking system isn't very high, nor excessive. What matters is the procedure to provide such an amount, and that's why it is important that European institutions open up and proceed with this," Mr. Montoro said. "What's needed is that European institutions start moving and look for a bank recapitalization through these procedures."
The ruling Popular Party has sought to keep discussion of aid for the country's banks separate from any suggestion of a hefty sovereign rescue package by the EU and the IMF that could amount to hundreds of billions of euros, indicating that any financial support should come from the European Central Bank or the EU bailout fund.
Under existing agreements, the euro zone's bailout funds cannot be used to directly recapitalize banks, although the EU Commission has signalled in recent days that allowing the European Stability Mechanism -- the permanent bailout fund -- to directly recapitalize banks is a "serious possibility."
However, such a move is resisted by Germany, which has indicated it would only back such ideas if European leaders were to give up more sovereignty and transfer significant powers over budgets to Europe as part of a longer-term process toward a "banking union."
A senior ally of German Chancellor Angela Merkel on Tuesday rejected calls to allow euro-zone bailout funds to bypass governments and inject capital directly into ailing banks.
Volker Kauder, the chief whip for Ms. Merkel's Christian Democrats in the German parliament, said Europe created the European Financial Stability Facility and the ESM to come to the aid of countries that need to support their banks, urging Madrid to decide quickly if it needs to tap these funds.
Separately, a euro-zone official speaking on condition of anonymity said Spain need not fear that it could be placed under a rigorous Greek-style monitoring program that would involve setting strict fiscal policy targets and enforcing the country's adherence to the conditions placed on the aid.
"It is reasonable to expect that given the enormous amount of work Spain is already doing that they won't have to do much," the official said. "The program would be tailor-made to deal with Spain's banks and would be very different from Greece, Ireland and Portugal."
Hobbled by an absence of credit due to the weakened state of a banking sector laden with bad property loans, Spain's economy has contracted in the past two quarters and the unemployment rate ran at 24.4% in the first three months of 2012, the highest in the European Union.
Data released Tuesday showed Spanish services activity fell in May at its fastest rate since November, the latest sign that the country's economy is still souring.
The purchasing managers' index for the services sector fell to 41.8 in May from 42.1 in April, according to a monthly survey conducted by Markit Economics, dropping further below the 50 threshold that means activity is shrinking. This was the 11th straight month in which service providers cut output, and there are few signs that activity will pick up again soon.
Mr. Montoro said he hopes that a deal creating a "banking union" in the European Union may be approved even before a series of EU summits due to take place later this month. He didn't specify the timing.
Spain's Prime Minister Mariano Rajoy is expected to take part in a summit in Rome, June 22 with Germany's Chancellor Angela Merkel, French President Francois Hollande and Italian Prime Minister Mario Monti. All 27 EU leaders will also meet June 28-29 in Brussels for talks that are expected to focus on laying out a path for deeper fiscal and financial integration in the euro zone.
Mr. Montoro's comments come after Ms. Merkel Monday suggested that EU leaders consider putting the largest banks in the 27-nation bloc under direct European supervision, opening the door to more centralized oversight of the region's financial sector.
The German proposal echoes a similar call from European Central Bank President Mario Draghi last week but stops short of endorsing more ambitious plans to safeguard the region's financial system by creating a so-called "banking union."
Under that idea, presented last week by the commission, there would be a Europe-wide depository insurance and other financial backstops.
But Dutch caretaker prime minister Mark Rutte Tuesday lashed out against these proposals, saying it is crucial for troubled member states to shore up their finances and implement reforms first.
In a debate in parliament, Mr. Rutte said he would be in favor of a European banking supervisor but he opposes a proposal to establish a euro-zone deposit insurance guarantee system and is also against both using ESM to directly recapitalize ailing banks and the creation of a joint-debt instrument for the currency area.
"These are all proposals we are not interested in," Mr. Rutte said.
(Santiago Perez in Madrid, William Boston in Berlin and Maarten Van Tartwijk in Amsterdam contributed to this story.)
Write to David Roman at david.roman@dowjones.com
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