Spain nears bailout

SPAIN warned that it is locked out of markets yesterday as an emergency call by G7 leaders failed to stem rising fears that the Eurozone’s fourth biggest economy will soon need a bailout.

Madrid’s Treasury minister Cristobal Montoro told Spanish radio: “The risk premium says Spain doesn’t have the market door open. [It] says that as a state we have a problem in accessing markets, when we need to refinance our debt.”

Although yields fell slightly yesterday, markets are currently demanding well over six per cent to lend to Spain for 10 years, with Madrid facing a crucial test at a €1-2bn (£809m-£1.62bn) debt auction tomorrow.

The yield on 10-year bonds appeared to be heading towards seven per cent last week, sparking demands from Spain for the ECB to step in and buy its debt.

If Spain cannot issue debt at affordable levels, it could seek international help to bail out its banks, the cost of which some analysts put at €150bn.

Investors had been hoping that an emergency phonecall convened between finance ministers of the world’s seven biggest economies would yield a grand announcement yesterday.

But instead, it ended with a promise that Eurozone leaders would respond “speedily” to the crisis. A source said there was discussion of the Chinese growth slowdown and Europe’s “progress” towards fiscal union but no grand bargain as to how it will be achieved.

Demand for one-week funding from the ECB has also spiked to its highest level since before November, when Frankfurt injected half a trillion euros of three-year loans into Europe’s banks.

Use of its one-week, one-per cent fixed rate loans reached €119bn from 96 banks, versus €51bn from 87 banks last week.

The single currency also fell yesterday against both sterling and the dollar as some traders warned it is “time to short the euro”. BNP Paribas’ Michael Sneyd said: “The recent rise in euro-sterling has not been justified by the... short-term fundamentals.”

Investors are now pinning their hopes on a meeting of G20 nations on 18-19 June where Germany is likely to come under pressure to embrace fiscal union. French foreign minister Laurent Fabius yesterday endorsed the idea of a “banking union” – whereby Europe’s richer countries would bail out the failing lenders in bankrupt states.

Meanwhile, Greece saw an acrimonious exchange between the two leading parties, centre-right New Democracy and radical left Syriza, ahead of its new elections on 17 June. Both parties accused one another of scuppering plans for a TV leaders’ debate and then lying about it.