Investors have taken fright at the size of Spain’s budget deficit, the rise in its public debt and the weakness of domestic banks.
Luis de Guindos, the economy minister, ruled out a bailout of the kind already provided to Greece, Ireland and Portugal by the EU and the International Monetary Fund, saying Spain “does not need a rescue at this time”.
Cristóbal Montoro, the budget minister, rejected suggestions that Spain could turn to the EU to prop up its banking system, saying the liquidity provided by the European Central Bank was already substantial.
Despite a sharp sell-off in Spanish sovereign debt and equities, senior EU officials insisted there had been no discussions about assisting Madrid with aid from the eurozone’s €500bn rescue fund. Instead, Brussels was pushing the government to implement the tough reforms already announced.
“The key now is that they stay the course and keep their nerve and implement their decisions,” said one EU official involved in talks with Madrid. “They’re dealing with the issues head-on.”
The yield on Spanish 10-year sovereign bonds rose to 5.99 per cent on Tuesday afternoon, while Italian yields also advanced.
Spanish sovereign yields are now more than four percentage points above those of Germany, a high “risk premium” that makes it harder and more expensive for Madrid to finance itself.
Italy and Spain are the third and fourth biggest economies in the eurozone after Germany and France, and officials at EU headquarters in Brussels and in national capitals are eager to convince investors that there will be no need for further bailouts.
“In the markets, it’s a good idea to ignore what’s happening in the short term,” Mr de Guindos said in Madrid.
Elected in November, the centre-right government of Mariano Rajoy had hoped that its economic and financial reforms would soothe the markets, especially when combined with the €1tn in extra liquidity doled out to eurozone banks by the ECB’s longer-term refinancing operations .
Investors, however, have baulked at the 2011 budget deficit bequeathed by the Socialists — 8.5 per cent of gross domestic product — and cast doubt on Mr Rajoy’s ability to reduce the shortfall to 5.3 per cent of GDP this year and 3 per cent in 2013, in line with EU demands.
“It’s very disheartening for Spaniards,” said one senior official in the Popular party government.
Another said: “We inherited a financial deficit and a deficit of credibility. . . Obviously, we would like there to have been a greater restoration of credibility than there has been.”
Investors have long criticised the lack of budget discipline in several of Spain’s autonomous regions, and questioned the government’s ability to restore fiscal order. Now they are also worried about the need to recapitalise former savings banks crippled by bad property loans.
Miguel Angel Fernández Ordóñez, the Spanish central bank governor, said in a speech on Tuesday that banks would need extra capital if the economy worsened more than predicted.
He described pushing through the financial sector reforms enacted since the creation of the official bank rescue fund in 2009 as “like doing a double job on a ship in trouble — at the same time as ordering the evacuation of the passengers it was necessary to repair the lifeboats”.
EU officials are more concerned about deficits and debt in Spain’s 17 autonomous regions. They say that although banks may need further shoring up, the problem is less significant than in Ireland, the other eurozone country laid low by a burst property bubble.