EU mulls Spain rescue plan

GERMANY and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks although Madrid has not yet requested assistance and is resisting political conditions, several EU sources said yesterday.

Madrid, the euro zone's fourth biggest economy, said on Tuesday it was effectively losing access to credit markets due to prohibitive borrowing costs and appealed to European partners to help revive its banks.

But Economy Minister Luis de Guindos said after talks at the European Commission yesterday there were no immediate plans to apply for a bailout.

Spain would await the results of an IMF report and an independent audit of the banking sector, both due this month, before taking decisions on how to recapitalise the banks, he said.

Sources familiar with discussions in Berlin and Brussels said intensive contingency planning was already under way for EU aid. Lawyers are examining the fine print of European treaties to see how Madrid could get money from the euro zone's rescue funds without the stigma of a full economic adjustment programme, they said.

European shares and the euro rose and safe haven German bond futures fell as investors positioned themselves for a possible surprise move by the European Central Bank to ease monetary policy at its monthly meeting yesterday.

A run of grim economic data and rising tension in financial markets over Spain's fragile banks and Greece's uncertain euro zone future has led markets to price in an outside chance that the ECB will lower rates.

Sources in Berlin said the German Finance Ministry believes the euro zone's permanent rescue fund, the 500-billion-euro European Stability Mechanism, due to enter into force next month, could lend directly to Spain's FROB bank rescue fund. EU lawyers are not convinced this would be legal.

One advantage would be that smaller euro zone countries such as the Netherlands or Finland could not hold up a loan since approval by the ESM board does not require unanimity.

A series of reforms to Spain's financial system have failed to persuade investors that huge losses from a 2008 property market crash have been fully addressed, and doubts about the cost of a final rescue have deepened the euro zone debt crisis.

Finance chiefs of the Group of Seven major economies, afraid of a possible run on Spanish banks, held urgent but inconclusive talks on the European situation on Tuesday.

"The market's expectation regarding further policy action globally is picking up," said Ian Stannard, an executive director at Morgan Stanley.

Underlining the dangers to the entire 17-nation zone of inaction, Moody's Investors Service cut the credit ratings of several German and Austrian banks, citing the greater risk of further shocks stemming from the region's debt crisis. Germany is the single currency's strongest economy.

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.

The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to accept a Greek-style bailout.

In the first public German pressure for Spain to apply for a bailout, the parliamentary floor leader of Chancellor Angela Merkel's conservatives said: "I think Spain needs to come under the rescue umbrella, not because of the country (the state budget) but because of its banks."

Volker Kauder, who is close to Merkel, told ARD television he did not believe Madrid could receive direct aid for its banks from the euro zone rescue fund and insisted that assistance to the state would entail the usual policy conditions.Reuters