Spain will soon issue new bonds to fund its ailing banks and indebted regions despite borrowing costs nearing the unsustainable 7 per cent level that forced other euro zone countries to seek international aid.
The move will further worsen public finances which are under scrutiny from investors and European officials concerned that Spain will fall victim to the regional debt crisis that led to bailouts in Greece, Portugal and Ireland.
Spain's banks and regions are at the heart of its economic problems and economists say there is little hope of emerging from recession until they have been reinforced.
A government source said Madrid would likely recapitalise Bankia, which asked for €19 billion on Friday, by issuing new debt and possibly by tapping the cash from the bank restructuring fund and the Treasury.
The risk premium demanded by investors to hold 10-year bonds compared to safer German debt reached its highest since the launch of the euro yesterday. Spain's 10-year yields were at 6.47 per cent.
The government has said repeatedly it does not need outside financial help but economists disagree.
Retail sales slumped by 9.8 per cent on the year in April, the biggest fall since the series began in 2003.
Spain has been hoping the regional central bank will come to the rescue by restarting its dormant bond-buying programme, designed to bring down borrowing costs for countries that have seen them soar during the debt crisis.
The ECB also helped banks, struggling to get access to cash, with two exceptional issues of long-term loans.
Many of the banks used the money to buy government bonds.But ECB policymaker Ewald Nowotny said there had been no discussion of restarting bond purchases or long-term loans and that it was up to national governments to rescue banks.
Foreign minister Jose Manuel Garcia-Margallo said in a television interview that Spain would recapitalise its banks, nursing hundreds of billions of euros worth of toxic assets from, without international help.
Bankia has asked for a total of €23.5 billion, including Friday's €19 billion, but many other banks are in trouble, suffering from bad loans that have climbed to an 18-year high.
Mr Garcia-Margallo said decisions about the other lenders would come after an external audit of the sector in June.
Spain is also trying to strengthen the financial system by encouraging a series of mergers. Liberbank, an unlisted savings bank, said it was in talks about a merger with rivals Ibercaja and Caja 3.
Separately, Popular bank said it had started negotiations to sell a majority stake in its Internet banking business to reinforce its capital position.
The European Commission, which monitors competition issues, said it had been in contact with Spain over the Bankia rescue.
Reuters
