Spain has admitted it is losing access to credit markets and appealed to its European partners to help revive its banks, a distress signal that will intensify global pressure on Europe to move faster to the aid of its fourth-largest economy.
Madrid's dramatic statement – that its borrowing costs had become prohibitive due to its banking crisis – came as the Group of Seven major economies, afraid of a possible run on Spanish banks, held urgent but inconclusive talks on the eurozone.
"The risk premium says Spain doesn't have the market door open," Spanish Treasury Minister Cristobal Montoro said. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."
The European Central Bank holds its monthly policy review later today (6 June) and could indicate a readiness to cut rates soon, although it is not expected to come up with any immediate initiatives to resolve the crisis.
Spain is the latest member of the euro area under pressure to accept international aid following financial rescues of Greece, Ireland and Portugal in the two-year debt crisis (see background).
The country is beset by bank debts triggered by the bursting of a real estate bubble, and aggravated by overspending by its autonomous regions.
A senior European G7 source, who requested anonymity due to the confidential nature of the G7 call, confirmed that Germany was pushing Spain to accept international aid to help it recapitalise its stricken banks.
"They don't want to. They are too proud. It's fatal hubris," the source said of the Spanish government.
Berlin and the European Central Bank have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.
Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own.
The European Union's top economic official, Olli Rehn, said Madrid had not requested EU assistance but other sources said a lot hinged on an independent audit of the capital needs of Spanish banks. They said the first-phase audit would be completed this month – potentially still weeks away.
Sources in Berlin and Brussels denied a report in German newspaper Die Welt that European officials were considering offering Spain a precautionary credit line via the bloc's rescue fund by mid-June.
Two Spanish government sources had said earlier that Madrid neither needed nor wanted such a line.
Germany is at risk of ruining itself and Europe again, as it did twice in the 20th century, former German Foreign Minister Joschka Fisher wrote in an op-ed for Project Syndicate.
“Unfortunately, the fire brigade is being led by Germany, and its chief is Chancellor Angela Merkel. As a result, Europe continues to try to quench the fire with German-enforced austerity with the consequence that, in a mere three years, the eurozone's financial crisis has become a European existential crisis,” Fischer writes.
“Do we Germans understand our pan-European responsibility? It certainly does not look that way. Rarely has Germany been as isolated as it is now. […] It would be both tragic and ironic if a restored Germany, by peaceful means and with the best of intentions, brought about the ruin of the European order a third time,” Fischer concludes.
Last week, the Commission adopted a package of proposals concluding the second European Semester of economic policy coordination and giving guidance for national policies in 2012-2013.
The major highlight of the reports was the situation in Spain, who faces a spiralling debt unless its banking sector receives massive help.
The Commission said the latest banking reform presented by Spain this month did not go far enough and needed to be strengthened to include provisioning on mortgages and lending to small businesses.
It also warned that unless policies are changed, Spain's debt will spiral to 100% of GDP by 2020. Madrid had one of the lowest debt ratios in the eurozone before the crisis at about 35 percent of GDP.
Spain has previously denied it would need an international bailout, following Greece, Ireland and Portugal.
6 June 2012: ECB monthly policy review held today