EU officials explore Spain aid plan

Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks although Madrid has not…

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 being placed under international supervision, European sources said today.

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

The European Central Bank dashed investors' hopes of an easing of monetary policy or another flood of cheap liquidity for banks despite saying that the euro zone money market has again become "dysfunctional".

The ECB left interest rates on hold at 1 per cent at its monthly meeting.

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The move raised pressure on EU political leaders to outline a solution to the bloc's festering debt crisis at a summit later this month.

Spanish economy minister Luis de Guindos said after talks at the European Commission today 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.

ECB president Mario Draghi said financial markets were not wrong to be worried about the future of the euro zone but they underestimated the political commitment backing the single currency. He welcomed EU leaders' agreement to step up work on a long-term vision for a full economic and monetary union.

"Some of the problems in the euro area have nothing to do with monetary policy," he told a news conference.

"I don't think it is right for monetary policy to fill other institutions' lack of action."

Acknowledging that the rate-setting governing council's decision was not unanimous, he said "a few members, I would say not many" had wanted a rate cut today.

Asked whether the central bank would take supportive action if the EU summit agreed to move towards a fiscal and banking union, he said there was no such "horse-trading" but the ECB would monitor developments and stood ready to act.

Meanwhile French finance minister Pierre Moscovici said the use of the euro zone's future ESM (European Stability Mechanism) rescue fund to directly recapitalise struggling Spanish banks would mean imposing conditionality in terms of banking supervision, not economic reforms.

Mr Moscovici, who is due to meet his Spanish counterpart Luis de Guindos later today, said the euro zone's existing EFSF bailout fund could also be used if aid were urgently required in the short term, before the ESM takes effect later this year.

Spain's borrowing costs have shot up to levels that many experts consider unsustainable over concerns about the cost of bailing out the countries' troubled banks. Treasury minister Cristobal Montoro said yesterday that at current rates, markets were effectively off limits to Spain.

Amid reports that Berlin is pushing Madrid to seek European aid to draw a line under its banking crisis, Mr Moscovici said it was up to Spain to decide whether it needed outside help and what kind.

"If the Spanish government wishes, and it decides so independently, we have instruments of solidarity which can be mobilised very quickly," Mr Moscovici told a news conference in Paris, adding that he would discuss this with Mr De Guindos.

"France favours the ESM being used to directly recapitalise banks with the appropriate supervisory conditions," Mr Moscovici said, noting this option would be discussed by European leaders at a summit at the end of June.

"The EFSF also already exists and can intervene through loans to the Spanish state for the recapitalisation of financial institutions."

Mr Moscovici appeared to suggest it would not be necessary for Spain to seek a full EU-IMF programme - which could imply onerous conditions in terms of economic reform - to gain financial support for its banking sector, which is tottering under the mounting weight of bad property loans.

He praised at length the economic reforms already undertaken by prime minister Mariano Rajoy's government to pare down the deficit and improve Spain's competitiveness.

German officials also said today that a deal was in the works which would allow Spain to recapitalise its stricken banks using EU aid but avoid economic reforms imposed from outside.

Mr De Guindos said today in Brussels that Madrid would make no decision on whether to seek European aid in recapitalising its banking systems until the results of analyses by the IMF and independent auditors were known.

With the EU Commission warning last month that France needed to undertake spending cuts and structural reforms to meet an EU deficit target of 3 per cent this year, Mr Moscovici said that Paris would honour its commitments.

"Reaching 3 per cent is an undertaking which will be met... but it is natural that a country like France should decide its own means of getting there," Mr Moscovici said.

He declined, however, to provide any details of budgetary plans until after a review of state finances is completed by the Court des Comptes - the state auditor - later this month.France's socialist government faces parliamentary elections on June 10th and 17th which will determine its ability to pass legislation over the next five years.

Political analysts say it is reluctant to announce unpopular budgetary measures before the elections.

Reuters