Spain

The brief afterglow from Greece's vote Sunday to try to remain in the euro was quickly extinguished by a cascade of bad news out of Spain that again rattled faith in the currency bloc's ability to support its most troubled members, The Wall Street Journal reported. Fresh data from Spain's central bank showed the country's lenders were sitting on the highest level of bad loans in 18 years and that their deposits continued to leak away.

Spain's borrowing costs jumped to a record Thursday, fanning concerns that the €100 billion ($125 billion) aid package planned for its banks won't suffice to stave off a much larger bailout for the entire country, The Wall Street Journal reported. Spain agreed last weekend to a bank-recapitalization plan it hoped would restore investor confidence in the country's credit-worthiness. Instead, investors have continued to jettison Spanish debt amid concerns that the deal for as much as €100 billion in aid will saddle the government with more debt at a time of deepening economic malaise.

After clinching a $125 billion bailout for Spain’s banks, Prime Minister Mariano Rajoy flew to Poland on Sunday for the Spanish team’s soccer match, declaring “this matter is now resolved.” Not so fast, prime minister. On Tuesday, Spain’s long-term borrowing costs soared to their highest level since the country joined the euro zone. Investors have apparently concluded that the rescue is potentially a much better deal for the banks and their shareholders than for the government, its taxpayers and bondholders, the International Herald Tribune reported.

Spain’s Treasury on Monday vowed to continue as normal with sovereign bond auctions, arguing that the eurozone’s weekend agreement on a €100bn bailout for Spanish banks would underpin the country’s debt market, the Financial Times reported. Market analysts have expressed doubts as to whether the deal to recapitalise banks with a loan injection via Spain’s state Fund for Orderly Bank Restructuring will provide lasting benefits. On Monday morning Spanish bonds rallied, but the euphoria quickly faded.

Euro zone finance ministers have agreed to lend Spain up to €100 billion to shore up its teetering banking system, the Irish Times reported. Madrid said it would specify precisely how much it needs once independent audits report in just over a week. After a conference call of the 17 finance ministers yesterday afternoon, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

German chancellor Angela Merkel said Europe was ready to act to ensure stability in the euro zone as Spain's credit rating was cut by three notches today amid expectations it may soon seek EU help for banks beset by bad debts, the Irish Times reported. Spanish prime minister Mariano Rajoy said he would wait for the results of independent audits of the banking system before talking with Europe about how to recapitalise troubled lenders. An International Monetary Fund report due out next Monday is expected to show Spanish banks need at least €40 billion, financial sector sources said.

Spain has made its most explicit call to date for European institutions to recapitalise the country’s banks amid concerns about its own ability to raise the billions of euros needed on sovereign bond markets, the Financial Times reported. Cristóbal Montoro, budget minister in the centre-right government, sent jitters through financial markets on Tuesday when he admitted that the high perceived risk of Spanish sovereign debt meant Spain “does not have the door to the markets open”.

European Union and French officials squared off against Germany on Monday over how best to help Spain’s ailing banks, drawing lines in the debate over the latest challenge to the euro zone, the International Herald Tribune reported. Olli Rehn, the European commissioner for economic and monetary affairs, and Pierre Moscovici, the French finance minister, offered cautious endorsement at a news conference in Brussels for the idea of letting Europe’s bailout funds inject money directly into troubled banks.

Madrid will regret refusing a front-door bailout. The straightforward way of dealing with Spain’s banking problem would be for the government to borrow 50 to 100 billion euros from the European Financial Stability Facility (EFSF) or the soon-to-be-created European Stability Mechanism (ESM), and inject that money into the banks. But Mariano Rajoy, the country’s prime minister, continues to deny publicly that the country needs such a rescue, Reuters reported in a Breakingviews commentary. There are probably two reasons.

Spaniards alarmed by the dire state of their banks are squirreling money abroad at the fastest rate since records began, figures showed on Thursday, and the credit ratings of eight regions were cut, Reuters reported. Spain is the next country in the firing line of the euro zone's debt crisis, with spendthrift regions and shaky banks threatening to blow a hole in state finances and pushing funding costs towards levels that signal the need for a bailout.