Belfast Telegraph

Spanish bailout fears stalk markets

By John Lichfield

European leaders meet in Brussels today amid growing fears that Spain, Europe's fifth-largest economy, is preparing to ask for a bail-out which would dwarf the €110bn (£92bn) rescue plan for Greece.

The Spanish government yesterday dismissed reports that it was already in discussions with the European Commission, International Monetary Fund and the US Treasury for a rescue package worth up to €250bn.

Officials in Madrid, Brussels and Paris said that the prospect of a Spanish bailout - which would take the European debt and euro crisis into a potentially dangerous new phase - was not on the Brussels summit agenda.

"Spain is a country that is solvent, solid and strong, with international credibility," said Prime Minister Jose Luis Rodriguez Zapatero.

Brussels' diplomats have been at pains to send out feel-good signals ahead of a summit in which Europe's leaders are supposed to take the first steps towards more disciplined and coordinated control of national finances. Those reforms are meant to restore confidence in the euro and underpin the €750bn EU and IMF safety net, created last month for eurozone countries that lose the confidence of the financial markets.

However, it is proving hard to shake off persistent market fears about Spain, which, if it needed a lifeline, would swallow up a large part of the emergency fund. Worryingly for the EU, the doubts about Spain - whether real or driven by speculation - are eerily similar to the gradual seeping away of confidence that sent Greece into a financial death spiral in March and April.

The Spanish government's cost of borrowing hit a new record yesterday. The interest rate gap, or spread, between 10-year Spanish bonds and their German equivalents, rose by more than 0.10 percentage point to 2.23 percentage points.

A senior Spanish banker, Francisco Gonzalez, the chairman of the BBVA, confirmed that foreign private banks were now refusing to provide liquidity. "Financial markets have withdrawn their confidence in our country," he said. "For most Spanish companies and entities, international capital markets are closed."