Economy Minister Luis de Guindos told journalists that Spain “does not need a rescue at this time,” as the liquidity provided by the European Central Bank was enough to shelter the country’s ailing banking sector.
Spain’s budget deficit and growing debt has worried investors, but senior EU officials said Brussels was pushing the Spanish government to implement tough reforms and announced and that there were no bailout talks, despite a sharp sell-off in Spanish bonds.
Prime Minister Mariano Rajoy announced new spending cuts on Monday in a bid to meet a stringent EU deficit limit. The EU welcomed the savings but many analysts fear they will lead to a deeper recession, a scenario that Spain’s Central Bank Governor Miguel Ángel Fernández Ordóñez said could mean banks will need more capital.
"If the Spanish economy finally recovers, what has been done will be enough, but if the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," he said at a conference in Madrid.
The economy is forecast to contract by 1.7% this year but is likely to deteriorate further as the government slashes €27 billion from the central budget, and billions more from spending in the country's 17 autonomous regions.
Ordóñez said it was unlikely the country would experience a strong recovery in the short-term.
"The solutions to the crisis, which came from excessive debt or loss of competitiveness, are very slow within a monetary union and that is why we can't afford to become complacent," he said.
The latest banking reform, introduced two months ago, urged banks to put aside around €50 billion of provisions to mop up real estate losses and encouraged mergers and costs savings without dipping into state funds.
The government says it will not need to inject more state aid into its banks, but many analysts are sceptical that simply forcing weaker rivals into the arms of more solvent players will be enough to fill funding gaps.
A weak auction of Spanish bonds last week underscored investor concern over the economy.
Spanish 10-year yields were 17 basis points higher at 5.95% after rising around 25 basis points last week. The spread over German Bunds is at its highest since early December, before the European Central Bank flooded banks with cheap three-year liquidity.
Italian bonds are also under pressure because analysts see it as vulnerable to Spanish problems.