Full-Blown Spanish Bailout Inevitable

A full-blown bailout for Spain is all but inevitable as it has lost control of its debt crisis, analysts say, despite Madrid’s insistence that it does not need rescuing.    Euro zone ministers are set for the first of several key meetings over Spain today.

Its budget minister insisted the country was stable despite soaring borrowing costs and a €100 billion lifeline thrown out for its banks.

“Spain has not been rescued because it does not need to be rescued,” minister Cristobal Montoro said yesterday.

But analysts warned Spain may not stay afloat without direct financial aid from its European neighbours. Greek elections on Sunday averted the immediate threat of Athens exiting the euro zone, but concern over Spain did not ease.

Spain paid high borrowing rates to investors in a sale of 12 and 18 month debt Tuesday. The yield on its benchmark 10-year bonds passed the 7.0% danger mark on Monday and was around 6.8% yesterday.

Spain’s Prime Minister Mariano Rajoy had demanded “urgent” action by the European Union to calm market tension, in a letter to its leaders at the start of June. He insisted the European Central Bank must play a role by providing liquidity.

But action by the ECB to help keep Spain’s borrowing costs down “is far from certain given the ECB’s reticence”, analysts warned. The onus is on political leaders ahead of a European Union summit on July 28 and 29.

Spain, the eurozone’s fourth-biggest economy, is expecting today to receive the results of tests by two firms of private auditors to determine how much it needs to borrow under the deal to stabilise its banks.

Madrid is expected to transmit an official request for that aid to its partners at a euro zone finance ministers’ meeting in Luxembourg later today, a European Union diplomat said in Brussels. Then on Friday leaders of Spain, Italy, France and Germany meet in Rome to thrash out a common position on the debt crisis ahead of the full summit in Brussels.

Spain also faces its next debt market test today, when it will try to raise up to €2 billion in a mix of two, three and five-year bonds.