Spain calls for European integration to save euro

(AP) Spain calls for European integration to save euro
By ALAN CLENDENNING and HAROLD HECKLE
Associated Press
MADRID
Spain’s Prime Minister Mariano Rajoy went on the offensive in parliament Wednesday, calling for greater European fiscal and banking integration in a battle to save the country and the wider 17-country eurozone.

Rajoy lambasted the Socialist opposition for not addressing the country’s banking debt crisis when it was in office from 2004 until November, and called for their support in “a project for European fiscal and banking integration.”

He said Europe now faced a key issue, “which is the subject of liquidity, debt sustainability, and that battle has to be waged in Europe,” Rajoy said in the lower chamber. “You and I agree on that, and I am waging it,” he said looking straight at leader of the opposition Alfredo Perez Rubalcaba.

Rajoy told Spain’s gathered lawmakers that he had sent a letter to Jose Manuel Barroso, president of the EU Commission, and Herman Van Rompuy, president of the European Council, calling for new measures that might help weaker states like Spain. Those could include sharing debt burdens across countries or guaranteeing bank deposits across the eurozone.

He said he would be present at a meeting of European leaders in Rome on June 22 “where I will back fiscal and banking integration.”

Rajoy’s sentiments were mirrored in the European Parliament in Strasbourg, France, where Barroso said the euro block needed a plan for the long term, including coordinated budgets and banking regulation.

Spain last weekend asked for a loan lifeline of up to (EURO)100 billion ($125 billion) from the 17 countries that use the euro to shore up Spanish banks. Because Spain’s borrowing rates in financial markets are high, the country can’t afford to raise the rescue money itself.

There are fears, however, that because the government will be responsible for repaying the banks’ rescue loans, the deal will add to public debt, hurting confidence in the country’s ability to finance itself. Its borrowing rates have in fact risen sharply since the weekend bailout announcement.

Analysts say the country is finding fewer and fewer international buyers for its bonds, leaving Spanish banks to buy an increasingly large amount of the government’s debt. As the banks continue to struggle with losses on real estate investments, the government is finding it harder to sell its bonds.

Spain does not have a particularly high debt to GDP ratio; at 68.5 percent, it’s far lower than even Germany’s, which is 81.2 percent. But Spain’s economy is in a deep recession and has poor growth prospects, making it very difficult for it to reduce debt.

Any trend upward is worrisome because the country also has a high deficit; at 8.9 percent of GDP, it’s among the highest in the eurozone.

Rajoy didn’t offer details about how the bank bailout plan will work except to say that banks will pay back the money they receive, but Spain’s El Mundo newspaper reported that the loans to the government will last 15 years at 3 percent with repayments to begin no later than 2017. El Mundo cited unnamed sources familiar with the negotiations, and Spain’s Economy Ministry declined comment on the report.

Rajoy released a letter Wednesday sent by him to top eurozone leaders just before Spain asked for the bailout last weekend. In it he pleads with EU leaders to push the European Central Bank to restart a program of Spanish bond purchases that helped ease the country’s borrowing rate last fall.

The letter, sent June 6 to Van Rompuy and Barroso, said Spanish companies and households desperately “need access to liquidity. This is impossible if doubts persist about the sustainability of the debt of sovereign states.”

It’s unclear what impact if any the letter would have, because the ECB is legally independent and forbidden by treaty to take instructions from politicians. The ECB’s suspended program of bond purchases was limited in size and duration and aimed at ensuring more uniform interest rates in the eurozone _ not at supporting Spain’s ability to borrow.

The interest rate Spain has to pay on it 10-year-bond _ an indication of market confidence on a country’s ability to pay off its debt _ fell slightly in afternoon trading down from Tuesday’s euro-era high of 6.81 percent. The spike in the yield followed a Fitch Ratings downgrade of 18 Spanish banks, predicting the weakness of the Spanish economy would continue having a negative effect on business. Stocks on Madrid’s benchmark index were up 1 percent.

It is not yet clear where the euro area bailout loans for Spain’s banks will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as all the other private bond investors.

However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments are supposed to be given a higher priority than everyone else’s _ which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain’s debt or demand a higher interest rate to compensate for the added risk of losses.

Spain will wait for the results of two independent audits of the country’s banking industry due by June 21 before saying how much of the (EURO)100 billion it will tap. The bailout loans will be paid into the Spanish government’s Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country’s teetering banks.

In a report released late last week, the International Monetary Fund estimated Spain needs around (EURO)40 billion to prop up banks hurting from an unprecedented real estate boom that went bust.

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Sarah DiLorenzo in Brussels and David McHugh in Frankfurt contributed to this report.