Spain cannot finance itself for long at the high rates it now pays on the markets, Spanish Prime Minister Mariano Rajoy warned yesterday on the eve of an EU summit.
If Spain, the eurozone’s fourth-biggest economy, is shut out of the markets it could lead to a full-blown bailout for the country with unfathomable consequences for the 17-nation eurozone.
“The most urgent subject is the subject of financing,” Rajoy told the Spanish parliament.
“We cannot finance ourselves for a long time at prices like those we are now paying,” the prime minister said as the yield on Spanish government 10-year bonds traded at more than 6.8 percent.
Rajoy’s message served as a blunt warning to his EU partners to take actions to reassure markets and bring down the punitive rates that Spain, Italy and other fragile eurozone economies must pay to finance themselves.
“There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries,” he said.
Investors are deeply concerned over Spain’s banking sector, which has been thrown a 100 billion euro (US$125 billion) rescue loan by the eurozone to fix balance sheets heavily exposed to the collapsed real-estate sector.
However, markets also are skeptical of Spain’s targets of slashing the public deficit during a recession with unemployment at 24.4 percent — the highest in the industrialized world.
They fear Spain, whose public debt would actually increase because of the banking loan, could be forced to seek a state bailout, going the same way as Ireland, Greece and Portugal before it.
Even the IMF has said it doubts Spain can meet its goal of slashing the deficit from 8.9 percent of economic output last year to 5.3 percent this year and 3.0 percent next year.
Rajoy said he would press his European partners to agree to “greater European integration,” including for fiscal and banking union among the eurozone partners.
However, pressure from Spain, Italy, France and other European nations for a pooling of eurozone debt in the shape of eurozone bonds has met stiff opposition from German Chancellor Angela Merkel.
In the run-up to the summit’s opening today, she even appeared to harden her line, dismissing eurobonds as “economically wrong and counterproductive” and saying she was “worried” there was too much talk of putting eurozone debt in one pot.
Merkel has reiterated that the answer to the crisis is “more Europe, not less Europe” and wants to see member states ceding sovereignty to Brussels.
“Guarantees and controls must go together,” she has frequently insisted.
Rajoy’s warning could also be directed at the European Central Bank (ECB), which has intervened on bond markets before when Spanish and Italian rates reached such unsustainable levels, but has stood on the sidelines for months.
The ECB has said it is up to EU governments to fix the root problems of fiscal controls.