Spain’s premier calls for bank unity

Men have breakfast in Caliu, a charity site in Barcelona, Spain. More than one hundred people are fed daily in Caliu in a charity program to help unemployed and people without financial resources. The Spanish economy is in a recession for the second time in three years as the damage from a housing bust persists. Foreclosures are rising, Spain’s banks are in worse financial shape and the government’s deficit is hitting worrisome levels. Enlarge photo

Emilio Morenatti/Associated Press

Men have breakfast in Caliu, a charity site in Barcelona, Spain. More than one hundred people are fed daily in Caliu in a charity program to help unemployed and people without financial resources. The Spanish economy is in a recession for the second time in three years as the damage from a housing bust persists. Foreclosures are rising, Spain’s banks are in worse financial shape and the government’s deficit is hitting worrisome levels.

MADRID – Spain’s prime minister appealed Tuesday for European leaders to push toward greater fiscal unity – a step that would allow its troubled banks to get direct financial help – while a top government official warned that the country’s high borrowing costs meant it faced increasing trouble accessing credit markets.

Mariano Rajoy told a Senate session that Europe “needs to support those that are in difficulty.”

“It needs fiscal integration with a fiscal authority and banking integration, a banking union with eurobonds, a banking supervisor and a European guaranteed deposit fund.”

European leaders are to hold a summit June 28 on how to stop the 17-country eurozone from collapse. The European Commission and the European Central Bank are expected to present measures at the meeting for creating a “banking union” that would oversee banks and possibly offer bailouts directly, bypassing national governments.

Spain is keen for its banks to be able to seek help directly because if the government were to ask for it from the EU bailout fund, the aid would come with strings attached – its fellow countries in the 17-nation eurozone and the International Monetary Fund could impose certain policies on the Spanish government, something the country is keen to avoid.

Spain’s most stricken lender, Bankia S.A., needs €19 billion, about $23.63 billion, in government aid, but Spain only has €5 billion left in a €19 billion fund that it established in 2009 to help banks. The government has promised to help Bankia but has not mapped out a plan.

The country has become the focus of Europe’s debt crisis because bailing out the eurozone’s fourth-largest economy would stretch the region’s finances to breaking point.

Rajoy was speaking as finance ministers and central bank presidents of the world’s seven wealthiest countries held an emergency conference call about Europe’s economic turmoil.

“Europe needs to say where it is going so as to ensure security,” he said. “It needs to say that the euro is an irreversible project and that it’s not in jeopardy.”

Earlier Finance Minister Cristobal Montoro told Spain’s Onda Cero radio that the high-risk premium being demanded for Spain’s benchmark 10-year bonds indicates “the door to the markets is not open for Spain.”

Spain’s borrowing costs have soared as investors become increasingly concerned the government’s public finances might be overwhelmed by the cost of rescuing banks that are sitting on massive amounts of soured property investments after the bursting of a real estate bubble that once fueled the economy.

“What the yield is saying is that as a state, in brief, Spain we have a problem when it comes to accessing markets, when it comes to refinancing our debt,” said Montoro.

The interest rate on the 10-year bond rate was at 6.31 percent Tuesday and although down substantially from last week it was still perilously close to the levels that pushed Greece, Ireland and Portugal to ask for bailouts over the last two years.

Spain is struggling with an unemployment rate of 24.4 percent, with more than 50 percent of people younger than 25 out of work.