Spain's finance minister insists no bailout needed

Spain's finance minister again insists again that the country does not need a full-blown bailout, even as the country's borrowing costs remain sky-high and the government admits its banks need to be rescued.
Spanish Finance Minister Cristobal Montoro, centre — seen attending a meeting with budget secretary Marta Fernandez Curras, left, and Public Administration Minister Antonio Beteta — says his country's government 'does not need to be rescued,' even if its banks do. (Juan Medina/Reuters)

Spain's finance minister insisted again Wednesday that the country's government does not need a full-blown bailout, even as the country's sky-high borrowing costs remained at dangerous levels.

On Tuesday, the interest rate on the government's 12-month treasury bills rose to 5.07 per cent from 2.98 per cent at the last such auction on May 14. The rate on the 18-month bills soared to 5.10 per cent from 3.3 per cent.

By Wednesday, the interest rate, or yield, on the Spanish benchmark 10-year bond fell 22 basis points to 6.78 per cent, below the seven-per-cent level it has been hovering above since Monday. But such high rates are still considered by market-watchers to be unsustainable over the long term rate and eventually forced Greece, Ireland and Portugal to ask for international financial help.

Finance Minister Cristobal Montoro told Parliament, however, that Spain's government won't need the same kind of assistance "because it does not need to be rescued."

After years of insisting its banks were among the healthiest in Europe, Spain did recently acknowledge its financial sector will need a rescue package to protect it from a property boom that went bust in 2008. But investors are now more concerned that the country itself may have to be bailed out and this could seriously test the strength of the entire European Union's finances.

Fears about high public debt

Worries about Spain's ability to repay its debt grew last week when the country agreed to accept a eurozone loan of up to $129 billion to shore up its ailing banks, which are sitting on massive amounts of soured real estate investments.

The big fear is that, as the money will count as a loan and raise Spain's overall debt load, the country's financing costs will suffocate the government as it tries to wade its way through a recession and a 24.4 percent jobless rate.

Because the government is ultimately responsible for repaying the banks' bailout money, the deal has increased fears about the size of public debt. If the government cannot get the bailout money back from the banks, it will be saddled with the losses.

Those losses could prove too much to handle for the government, which is already struggling with a second recession in three years and the highest jobless rate among the 17 countries that use the euro.

Independent audits on the state of Spain's banks are due Thursday and these will help Spain determine how much it needs from the $129-billion lifeline the 17-country eurozone has agreed to set up.