Spain says losing credit access, seeks help for banks

Spain said it is losing access to credit markets and appealed to its European partners to help revive its banks, a distress signal sure to intensify global pressure on Europe to move faster to the aid of its fourth-largest economy.

Madrid's dramatic statement – that its borrowing costs had become prohibitive due to a banking crisis – came as the Group of Seven major economies, afraid of a possible run on Spanish banks, held urgent but inconclusive talks on the euro zone.

As if to underline the dangers to the entire 17-nation zone of inaction, Moody's Investors Service cut the credit ratings of several German banks on Wednesday, citing the greater risk of further shocks stemming from the region's debt crisis. Germany is the single currency's strongest economy.

“The risk premium says Spain doesn't have the market door open,” Spanish Treasury Minister Cristobal Montoro said. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt.

Asian shares nudged up on Wednesday following sharp falls last week, although concerns about Spain and that a Greek election on June 17 could lead to Athens' departure from the euro area capped the gains.

The European Central Bank holds its monthly policy review later on Wednesday and could indicate a readiness to cut rates soon, although it is not expected to come up with any immediate initiatives to resolve the crisis.

Spain is the latest member of the euro area under pressure to accept international aid following financial rescues of Greece, Ireland and Portugal in the two-year debt crisis.

The country is beset by bank debts triggered by the bursting of a real estate bubble, aggravated by overspending by its autonomous regions.

The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to accept a Greek-style bailout.

Montoro's comments on Spain's borrowing sent the euro down after the currency had hit a one-week high against the dollar on hopes that the conference call of G7 finance ministers and central bankers might hasten action.

It inched up 0.1 per cent to $1.2460 in Asian trade on Wednesday.

A senior European G7 source, who requested anonymity due to the confidential nature of the G7 call, confirmed that Germany was pushing Spain to accept international aid to help it recapitalise its 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.

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.

The European Union's top economic official, Olli Rehn, said Madrid had not requested EU assistance but other sources said a lot hinged on an independent audit of the capital needs of Spanish banks. They said the first-phase audit would be completed this month - potentially still weeks away.

Sources in Berlin and Brussels denied a report in German newspaper Die Welt that European officials were considering offering Spain a precautionary credit line via the bloc's rescue fund by mid-June.

Two Spanish government sources had said earlier that Madrid neither needed nor wanted such a line.

Another euro zone source pointed to the Spanish bank audit as the next pivotal moment. One option being discussed in some euro zone capitals was for money to be handed to the Spanish bank rescue fund FROB to avoid the government having the stigma of asking for aid, a third source said.

"RUNNING OUT OF RUNWAY"

The US Treasury, which chaired the G7 phone hook-up, said in a statement that the group's finance chiefs had 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 steps.

Japanese Finance Minister Jun Azumi added on Thursday that major economies needed to ease market fears and referred to a G20 meeting in Mexico on June 18-19.

The G20 summit, to include both Japan and China, the world's top creditors, is shaping up as a key focus of global efforts to contain the euro zone crisis.

"We will cooperate and share responsibility to ease market worries through these meetings," Azumi told reporters.

The United States, which is pressuring European governments to take a bold step toward financial and fiscal union, would like to see the makings of a plan by the G20 summit.

U.S. President Barack Obama, whose re-election chances this year could be jeopardised by another global financial crisis, has been anxious not to be seen dictating to Europe.

But Canadian Prime Minister Stephen Harper was more forthright on Tuesday: "I don't want to sound too alarmist, but we are kind of running out of runway here."

Indeed, the senior European G7 source, said just before the teleconference that the call was set to turn into a "Germany-bashing session", with other partners applying severe pressure on Berlin to do more to stimulate growth and move away from its prescription of fiscal austerity for the region's weaker economies.

EU 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.

"It doesn't look like they have a quick fix at hand, not a fundamental game changer at this point in time," said Rainer Guntermann, strategist at Commerzbank in Frankfurt.

Longer term, European leaders have begun thinking seriously about the economic union needed to secure the single currency. But that end-game is still months or years away.

MOUNTING CONCERN

Emilio Botin, chairman of Spain's biggest bank, Banco Santander, told Reuters that Spanish banks needed about 40 billion euros in additional capital - consistent with figures that are deemed "perfectly accessible" by the government.

Spain will test the market on Thursday by issuing up to 2 billion euros in government bonds at auction.

The ECB has so far shunned calls to resume purchases of Spanish government bonds, and Germany has rejected allowing direct aid f r om the euro zone's rescue fund to recapitalise Spanish banks without setting conditions for the government.

Pressure is building on Germany, the biggest contributor to euro zone rescue funds, to work harder on fostering growth.

Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.

Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would consider the idea of putting systemically important cross-border banks under European supervision.

However, Berlin is so far resisting a joint deposit guarantee for euro zone banks and a bank resolution fund, both of which would create new liabilities for German taxpayers.

Copyright @ Thomson Reuters 2012