Aid banks directly, Spain says

Under current rules, money has to go through government

— Spain insisted Wednesday that it will continue to push for European financial aid to be delivered directly to its troubled banks, rather than count as government debt, warning that these were crucial moments for the euro currency union.

The Spanish government has requested a rescue package from its eurozone partners of up to $125 billion for banks loaded with toxic assets after the collapse of a Spanish real-estate bubble in 2008.

But under current rules, the money has to go through the government. The fear has grown that the government may be ultimately left to repay many of the banks’ rescue loans and need a bailout of its own. As a result, investors are now demanding high interest rates to lend Spain money.

“I will continue to try to get direct recapitalization for the banks,” Prime Minister Mariano Rajoy told Parliament.

It is not clear if a decision on the issue will be made atthe European Union summit in Brussels today and Friday.

The 27 countries in the European Union face a daunting task: consider plans to tackle Europe’s government debt problems, fix Europe’s banks, help Greece and stimulate Europe’s sluggish economy.

Any proposals that might be approved at the summit may not be bold or fast enough to turn back the threats closing in on Europe. And Germany, wary of being stuck with the bill for a rescue plan, might veto the ideas first.

“We’re seeing faster movement on the policy front,” said Barry Eichengreen, an economist at the University of California, Berkeley. “The problem is, the crisis doesn’t wait.”

Spanish Economy Minister Luis de Guindos told Parliament he had held talks with eurozone colleagues Wednesday ahead of the summit.

“We face decisive hours in terms of the situation in the eurozone and the economic measures to be taken in Spain,” he said.

The interest rate for Spain’s benchmark 10-year bonds - an indicator of investor wariness - was at 6.79 percent Wednesday, a rate considered unsustainable over the long term.

“The most urgent issue is financing,” Rajoy said. “We can’t continue for a long time to finance ourselves with these prices; there are many institutions and financial entities that don’t have access to financial markets.”

The Bank of Spain on Wednesday said the economy had slumped further in the second quarter and would likely post a sharper contraction than the 0.3 percent of the first three months.

The bank’s June report said drops in consumer demand, car sales and industrial production “indicate activity has continued to diminish at a greater rhythm.” Unemployment is at 24.4 percent.

Official second-quarter GDP figures are scheduled for publication in July.

Italy’s borrowing costs on its six-month bonds jumped Wednesday to their highest level since December in the face of German opposition to Premier Mario Monti’s call for joint action to ease Europe’s debt crisis.

The Italian Treasury sold $11.23 billion in short-term bonds but the interest rate it had to pay rose to 2.96 percent, up from 2.10 percent a month ago. The rate was also the highest since the end of 2011, when Italy was at the forefront of Europe’s debt crisis concerns.

“Italy is safe from immediate risk, but it isn’t [safe] from fundamental risks, just like the rest of Europe,” Monti said in a speech Wednesday night in Brussels, the Italian news agency LaPresse reported.

Information for this article was contributed by Paul Wiseman of The Associated Press.

Business, Pages 21 on 06/28/2012

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