MercoPress. South Atlantic News Agency

Spain calls on Europe for a show of force “to dissipate any doubts about the Euro”

PM Rajoy trying to shore up banks and help cash-strapped regions

Spanish Prime Minister Mariano Rajoy called for a show of force from European authorities as his government sought ways to avoid tapping markets to fund the bailout of the nation’s third-biggest lender.

“Europe has to dissipate any doubts about the Euro,” the premier told a hastily called news conference in Madrid. It “must affirm that the Euro is an irreversible project and act in consequence.”

Spain is trying to shore up its banks and help cash-strapped regions while its own borrowing costs compared with Germany’s are the highest since the creation of the Euro.

As Spain’s narrowing market access depends on domestic lenders financed by the European Central Bank, the government is considering using public-debt securities rather than cash to fund the 19 billion-Euro bailout of BFA-Bankia.

Rajoy repeated that he wouldn’t seek a European rescue for the nation’s banks. Still, he said the European Stability Mechanism, which is due to start operating as a permanent rescue fund in July, should be able to recapitalize struggling banks directly, bypassing national governments.

However European leaders are split over the issue, an EU official said on May 22, as the statutes say support must be channeled through national governments. Rajoy said “a lot of people” agreed with him, without giving details.

Rajoy also called for help from European authorities to address the “sustainability” of public debt. He didn’t name the ECB, as he did on May 23 when he called on the central bank to support Spanish bonds after a meeting of European leaders.

ECB Executive Board member Jose Manuel Gonzalez-Paramo said in an interview with Spanish state newswire Efe that the government should talk less about what the central bank should do. The ECB has already shown “largesse” to Spain, which was the main beneficiary of its decision to offer 1 trillion Euros of three-year loans to banks in December and February, Gonzalez- Paramo said.

Using public-debt securities instead of cash to bailout BFA-Bankia (BKIA), the lender Spain nationalized on May 9, may shift the burden of recapitalizing it to the Frankfurt-based ECB as banks can use such securities as collateral to get cash from the central bank. Spanish lenders’ net average borrowings from the ECB rose to a record 264 billion Euros in April, compared with 42 billion Euros a year earlier, according to data from the Bank of Spain.

Spain’s bank-rescue fund, which has already committed 18.7 billion euros, equivalent to 1.8% of GDP, to shoring up lenders, has 5 billion Euros in cash. BFA-Bankia, with the biggest Spanish asset base, said on May 25 it would need 19 billion Euros to clean up toxic assets and bolster capital.

Rajoy called his unscheduled news conference as the gap between Spanish and German bond yields widened to as much as 513 basis points, the most since the start of the Euro in 1999. The spread closed at 512 basis points, with 10-year yields at 6.48%, 64 basis points higher than before Bankia was nationalized.