Spain Bank Aid to Add to Government Debt

CIARAN GILES
Associated Press
MADRID
The eurozone group of nations insisted Wednesday that the rescue loans for Spain's troubled banks would be channeled through the national government, adding to its sovereign debt. Madrid had petitioned to have it paid directly to the banks to not raise concerns over its public debt.

A Eurogroup statement said the aid would be given to Spain's bank restructuring fund, or FROB, and that the Spanish government would "remain fully liable" for it.

Spain has asked for up to (EURO)100 billion ($125 billion) in rescue loans from its eurozone partners for Spanish banks loaded with soured assets left over from the collapse of a real estate bubble in 2008. The exact figure to be sought is expected to be determined and made public by July 9.

Under current rules, the money has to go through the government and fears have grown that the government may be ultimately left to repay many of the banks' rescue loans and will need a bailout of its own, just like Greece, Ireland and Portugal. As a result, investors are now demanding high interest rates to lend Spain money.

A sovereign bailout for Spain, the eurozone's fourth-largest economy, would seriously challenge the EUs finances.

Spain insisted earlier Wednesday it would continue to push for the aid to be delivered directly to the ailing banks, rather than count as government debt, warning that these were crucial moments for the euro currency union. Spain's Prime Minister Mariano Rajoy will meet with European counterparts in Brussels on Thursday and Friday.

"We face decisive hours in terms of the situation in the eurozone and the economic measures to be taken in Spain," said Economy Minister Luis de Guindos after speaking with some eurozone colleagues Wednesday.

The interest rate for Spain's benchmark 10-year bonds _ an indicator of investor wariness _ closed at 6.88 percent Wednesday, a rate considered unsustainable over the long term.

"The most urgent issue is financing," said Rajoy. "We can't continue for a long time to finance ourselves with these prices; there are many institutions and financial entities that don't have access to financial markets."

The Eurogroup, representing the 17 nations using the single euro currency, said the loan and its conditions would be monitored by international financial experts. It also said that Spain would be expected to maintain its commitment to apply structural reforms to ensure the reduction of its budget deficit to the EU limit of 3 percent by the end of 2013.

Spain has been claiming that only the banking sector would be subject to conditions for the loan.

The country's deficit soared to 11.2 percent in 2009 as the crisis hit Spain full on. It was 8.5 percent last year - 2 percent above target - and the agreed aim for 2012 is 5.3 percent.

The Bank of Spain on Wednesday said the recession-stricken economy slumped further in the second quarter and would likely post a sharper contraction than the 0.3 percent of the first three months.

The bank's June report said drops in consumer demand, car sales and industrial production "indicate activity has continued to diminish at a greater rhythm." Unemployment is at a staggering 24.4 percent.

Official second-quarter GDP figures are due to be published July 30.

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