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Mariano Rajoy says Spain is 'finding it very difficult to finance itself' but insists there will be no bail-outs

Spanish stocks plunged to a nine-year-low and its borrowing costs rose as traders refused to believe Mariano Rajoy’s claim that Madrid could salvage its banks without a bail-out.

the Telegraph,

28 May, 2012

At a press conference designed to reassure markets after the €19bn nationalisation of Bankia, the prime minister admitted that Spain was “finding it very difficult to finance itself”.

But Mr Rajoy blamed the soaring borrowing costs on advancing debt crisis across the eurozone, and tried to dismiss fears that Madrid will be crushed by the debts of its banks.

Shares in Bankia, which were suspended on Friday as the government unveiled its largest ever recapitalisation plan, plunged 27pc before recovering.

The Spanish newspaper, El Mundo fanned the fear by claiming that a further €30bn was required to rescue four other banks, CatalunyaCaixa, Novagalicia, Banco de Valencia.

Officials claimed Madrid was already working on complex plans to use the European Central Bank to help recapitalise Bankia, but Mr Rajoy said Spain would stand by its banks by itself. “There will be no rescue of Spanish banks,” he said.

He said he wanted the bail-out fund, the European Stability Mechanism, to be allowed to lend directly to banks - but argued this would be for the sake of banks across the eurozone, not just Spain. “The [Spanish] government is doing what it should be doing,” said Mr Rajoy, who rarely speaks publicly on the debt crisis. “Europe must dissipate any doubts over the euro, affirm that the euro is an irreversible project and act in consequence.”

Spain’s Ibex fell 2.17pc, dragging other bourses down, although trading was low due to US and European holidays. The yield on Spain’s benchmark 10 year bonds plunged deeper into the danger zone, rising to 6.48pc. The spread between German and Spanish debt yields to the widest spread since the euro was launched.

“Spain is finding it very difficult to finance itself with sovereign debt risk premium so high,” said Mr Rajoy. “With [the spread over bunds] reaching 500 basis points it is very difficult to raise finances.”

But he argued: “I think right now there are serious doubts about the euro zone, and that naturally makes the risk premium in some countries is very high. That is exactly what happens at this time and, therefore, would be very important to send a clear signal about the irreversibility of the euro.”

Nicholas Spiro, at Spiro Sovereign Strategy: “The Spanish crisis has reached a tipping point. Investors have lost confidence in Spain. The botched bail-out of Bankia was the trigger for the abrupt sell-off - a sell-off that threatens to turn into a rout unless bold and decisive measures are swiftly taken by eurozone policymakers to shore up the bloc’s endangered sovereigns and their banks.”

David Cameron last night held a meeting to discuss debt crisis with Lord Turner, chairman of the Financial Services Authority, and Sir Mervyn King, Governor of the Bank of England. It is though that the prime minister, who was joined by Nick Clegg, was being briefed about the on-going contingency plans to protect the UK economy from a break-up of the eurozone.

Separately Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee, warned about its impact on the UK. “Heightened fears [about the eurozone] may already have been affecting the growth of UK activity, investment and productivity for some time,” he said. “Were the worst-case risks in the euro area actually to be realised, then our own monetary policy would again play its part in mitigating the impact.”

The Greek finance ministry said it completed the recapitalisation of its four biggest banks with the transfer of €18bn from the Hellenic Financial Stability Fund (HFSF).

Italy sold €3.5bn of short-term bonds but was forced to pay 4.037pc versus 3.355pc at a similar auction last month. Meanwhile the ECB said it with-held it bond-buying programme for the 11th week in a row last week despite growing pleas from the periphery for help.