Beleaguered Spain sought French support in the face of its soaring borrowing costs Wednesday as Europe’s economic crisis deepened with a slump in German confidence and worsening British recession.
After talks in Berlin Tuesday, Spanish Finance Minister Luis de Guindos met French counterpart Pierre Moscovici in Paris as the eurozone tries to contain fears Spain may be headed for a full bailout.
In Berlin, de Guindos and German Finance Minister Wolfgang Schaeuble had issued a joint statement saying Spain’s borrowing costs do not correspond to its economic strength or the “sustainability of its public debt”.
A German finance ministry spokesman denied Spain was seeking a new bailout, saying: “This is wrong, it is not on the agenda.”
Storm clouds were meanwhile gathering over Europe’s top economy, with data showing that business confidence in Germany dropped again in July as companies grow increasingly wary of fallout from the eurozone debt turmoil.
The Ifo economic institute’s closely watched business climate index dropped to 103.3 points in July from 105.2 points in June, a slightly steeper decline than analysts expected. It was the third month in a row the index fell.
New data also showed that Britain, a eurozone outsider but closely connected to the bloc’s economies, suffered a worse-than-expected 0.7 percent contraction in the second quarter as recession tightened its grip.
De Guindos’s meeting in France came after Spain sparked anger Tuesday by issuing a statement reportedly on behalf of Madrid, Paris and Rome expressing impatience at a delay in major eurozone financial reforms.
France and Italy immediately denied they had joined in the call, which would have likely been interpreted as a thinly disguised challenge to Germany.
But on Wednesday the French government spokeswoman said President Francois Hollande wanted “rapid and firm implementation” of the reforms agreed in June to support banks and growth.
Hollande told ministers at a cabinet meeting Wednesday that “the decision of the European Council at the end of June absolutely must be implemented rapidly and firmly,” she told reporters.
The reforms are part of an accord struck in Brussels that paves the way for the eurozone’s 500-billion-euro ($600 billion) bailout fund to recapitalise ailing banks directly, without passing through national budgets and adding to struggling countries’ debt mountains.
But this can occur only after a Europe-wide banking supervisory body is set up, with leaders aiming for that to happen by the end of the year.
Ratings agency Moody’s on Tuesday delivered bad news for the bailout fund — the European Financial Stability Facility (EFSF) — by lowering its outlook from stable to negative, a day after threatening the triple-A credit ratings of Germany, The Netherlands and Luxembourg.
The EFSF, which was established with a total lending capacity of 440 billion euros, is to be replaced eventually by a 500-billion-euro permanent rescue fund called the European Stability Mechanism.
Economists increasingly agree that a eurozone bailout of up to 100 billion euros agreed for Spain’s banks will be insufficient to get the country through the crisis brought on by a collapse of its real estate boom in 2008.
One Spanish region, Valencia, has already requested help from the 18-billion-euro fund set up by the central government to rescue struggling regions and another region, Catalonia, has indicated it may do the same.
Spain’s borrowing costs have hit their highest level since the country adopted the euro, with yields on 10-year government bonds hitting 7.621 percent Tuesday — the levels that forced Greece, Ireland and Portugal to seek EU-IMF bailouts.
But the yield eased on Wednesday to a still high 7.376 percent. The euro meanwhile gained to $1.2127 after striking a two-year low of 1.2043 on Tuesday.
Analysts said Spain needs either a bailout or market intervention by the European Central Bank to force its borrowing costs down by buying bonds.
The ECB has done this before but it is not clear if it is ready to step in again now without clear backing from the major eurozone states, especially Germany.
European Commission president Jose Manuel Barroso meanwhile protested against efforts to cut the 2013 European budget, saying they undermine plans to promote growth and jobs.
In a letter to European heads of state and government, he lashed out at plans to cut the draft budget by five billion euros ($6.1 billion).