Spain Warns of Increasing Debt Costs

Posted June 27th, 2012 at 2:45 pm (UTC-5)
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With Spain's economy sliding at a faster pace, Prime Minister Mariano Rajoy is warning that the government will not be able to sustain its high borrowing costs for much longer.

Mr. Rajoy told parliament Wednesday that European leaders need to adopt strong banking and fiscal ties when they hold a two-day summit, starting Thursday in Brussels. The Spanish leader said he will call for leaders in the 17-nation currency bloc to send a $125 billion rescue package directly to Spanish banks, rather than through the Madrid government as is now required, so the government would not ultimately be responsible for paying back the loans.

Later, however, eurozone finance ministers rejected Mr. Rajoy's plan, declaring that Spain would be “fully liable” for the bank rescue loans.

The Spanish leader said his country “is going through a very difficult economic situation.” Spain's central bank said the country's economy is contracting faster in recent months than in the first quarter of this year, when it fell three-tenths of a percent. The government, looking to save $548 million, said it plans to end state subsidies for more than 450 medicines used by patients throughout the country.

Mr. Rajoy said Spain, Italy and other debt-ridden countries need currency bloc leaders to send a clear signal to international financial markets “that the euro is here to stay.” Spain's borrowing costs have risen in recent days to near the 7 percent interest rate on government debt at which the Greek, Italian and Portuguese governments all were forced to secure international bailouts.

Numerous European leaders are pushing Germany, the eurozone's most potent economic force, to do more to ease the financial plight of the currency bloc's weaker governments. But German Chancellor Angela Merkel told her parliament that Germany can only do so much, and that austerity spending measures remain the key to improving government finances.

“I expect controversial discussions in Brussels and once more, all eyes — or at least a lot of eyes — will be focused on Germany. But I reiterate here and today what I have last said in this parliament on June 14: Germany is a growth engine and a stabilizing anchor in Europe. But even Germany's strength is not unlimited. We must not over-strain Germany's strength.''

Some eurozone leaders are calling for the sale of eurobonds, supported by the entire currency bloc. But Ms. Merkel remained adamant in her opposition because they likely would increase Germany's borrowing costs.

“Apart from the fact that eurobonds and euro bills and so on are unconstitutional in Germany, I believe they are economically wrong and counterproductive.''

Meanwhile, the eurozone's finance ministers said a bailout for Cyprus, with one of the eurozone's smallest economies, “seems warranted.” Banks on Cyprus are faltering because of their investments in the weak economy in nearby Greece, but Cypriot officials have yet to set the amount they need.

The International Monetary Fund said Cyprus is also seeking assistance from the Washington-based lender.