Spain said on Tuesday that credit markets were closing to the eurozone's fourth biggest economy 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 shut to Spain.
The European Union's top economic official, Olli Rehn, said Madrid had not requested EU assistance, but German newspaper Die Welt said European officials were considering offering Spain a precautionary credit line via the bloc's rescue fund by mid-June. "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 in 2008, aggravated by overspending by its autonomous regions. The premium investors demand to hold Spanish 10-year debt rather than safe haven German bonds hit a euro era high of 548 basis points on Friday, on concerns that it will eventually be forced to seek a Greek-style bailout.
A precautionary credit line would give Spain the option of trying to raise funds on its own to recapitalise its banks and tapping the European aid if it failed to raise enough. Two Spanish government sources denied earlier on Tuesday that Madrid needed or wanted such a line from the European Financial Stability Facility or the International Monetary Fund.
But Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and prompting the Madrid stock market to rise. His 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 the conference call of G7 finance ministers and central bankers might hasten action.
The US 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 action. White House economic adviser Michael Froman said the EU had done a lot to address its debt problems but clearly 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.
"I see market anxiety over world economy largely stemming from Europe's problems," Azumi told reporters in Tokyo. 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." 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 recapitalise 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. 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.