Spain discusses state bailout

Spain has at last conceded it may need a state bailout and policymakers are considering writing down Greek debt to their central banks, European officials said today, as markets anticipated radical new action to pull the continent out of its debt maelstrom.

European Central Bank President Mario Draghi, who yesterday pledged to do whatever was necessary to protect the euro zone from collapse, is to meet Germany's Bundesbank president Jens Weidmann to discuss a raft of other measures to address the region's crisis, according to a Bloomberg report.

Citing two central bank officials, the report said Mr Draghi's proposal involves Europe's rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates.

Mr Weidmann poses the biggest obstacle to any ECB plan to buy government bonds, and Mr Draghi would need to win him over. A Bundesbank spokesman said meetings between the two men "are not unusual; they take place if there is something that needs to be discussed".

An ECB spokeswoman also said it was usual practice for Mr Draghi to meet with governing council members such as Mr Weidmann, but declined further comment.

The Bloomberg report also said Mr Draghi favoured granting a banking licence to the euro zone's planned permanent bailout fund, the European Stability Mechanism (ESM), which would allow it to borrow money and deploy more firepower if called upon to rescue an economy as big as Spain's.

The crisis in the euro zone has been thrown into higher gear by a surge in borrowing costs for Spain and by an acknowledgement by Brussels officials that Greece is too far off its targets to be saved by its second bailout package, agreed just five months ago.

Spain, the next country in the firing line, is far larger than the four other countries that have accepted EU bailouts, and rescuing it would require action on a scale as yet unforeseen. It may be a price that needs paying to save the single currency, analysts say.

Though far smaller, Greece has the potential to send shockwaves across the region should it default on its debts and leave the euro. The European officials on Friday described a further restructuring of Greek debt as a last chance to restore the country to solvency.

A euro zone official said Economy Minister Luis de Guindos had brought up the prospect of a 300 billion euro bailout this week at a meeting with Germany's Finance Minister Wolfgang Schaeuble.