Spanish leader gives up no-bank bailout mantra

MADRID – Spain's Prime Minister appeared Thursday to have abandoned his insistence that the country's troubled banking sector will not need an external bailout, as for the first time he avoided ruling out such an option.

Germany, meanwhile, without mentioning Spain by name, also gave its clearest hint yet that it thinks Spain should tap the European rescue fund before its banks become too toxic to handle.

Spanish Prime Minister Mariano Rajoy said he would wait for the results of an IMF report next week and then two independent audits before announcing how much the banking sector might need for recapitalization.

But for what seemed to the first time in public, he did not rule out the idea of the money coming from outside. Until now it has been his firm line that Spain's banks, while hurting from an imploded real estate bubble and stuck with lots of foreclosed property and non-performing loans, would not need an external rescue.

"At that point I will give my figure and the government will say what the system needs to recapitalize itself," Rajoy told a news conference, referring to how much Spain's banks might need.

With that number in hand, and after consulting with European colleagues and officials, Rajoy said, "we will take the decision that is best for the overall interests of the Spanish people."

German Chancellor Angela Merkel said Thursday after meeting with British Prime Minister David Cameron: "Considering the problems we are facing today, it is important to highlight once again that we have created the instruments necessary to support (countries) in the Eurozone, and that Germany is willing to apply these instruments whenever necessary."

She added, "this expresses our firm political will to stabilize the Eurozone, so that the Eurozone can contribute to stable economic growth worldwide."

Earlier, Spain raised €2.1 billion ($2.62 billion) Thursday from the bond markets — but investors demanded a higher interest rate out of concern that the country's troubled banks were weighing heavily on government finances.

The successful sale of medium and long-term debt came just days after Finance Minister Cristobal Montoro warned that the high interest rates demanded by investors on Spanish debt in recent weeks indicated "the door to the markets is not open for Spain."

Spain's banks are saddled with billions in soured property investments following the bursting of the country's real estate bubble. At the end of May, the most stricken lender, Bankia S.A., said it needed €19 billion in government aid to shore up its finances against losses on its toxic home loans. But Spain only has €5 billion left in a €19 billion fund that it established in 2009 to help banks and has not mapped out a plan for raising the extra funds.

Estimates have put the cost of a complete bailout for the Spanish banking sector between €40 billion and €100 billion. Rajoy Thursday refused to offer an estimate.

Spain would like to get European aid for its banks but is reluctant to ask for it because under current rules the aid would have to be given to the government. That would allow Brussels to dictate policies to Madrid, something the Spanish government is keen to avoid. It would also further hit investor confidence, sending interest rates on its bonds even higher.

The interest rate on Spanish debt has soared in recent weeks to as high as 6.7 percent on fears over the country's creditworthiness. A rate of 7 percent is considered by market-watchers as unsustainable over the long term — and the point at which Greece, Ireland and Portugal had asked for a bailout.

"There is talk on the start of different solutions, but there's still nothing concrete," said Antonio Barroso, an analyst with the Eurasia Group political risk consulting group. "And I think that's why markets are still a little bit hesitant."

The country has become the focus of Europe's debt crisis because bailing out the eurozone's fourth-largest economy would likely stretch the region's finances to breaking point.

However, there have been reports that European Union officials have been exploring ways to inject funds into the country's fragile banking sector without imposing strict conditions. The Financial Times said Wednesday that such a move could make the Spanish government less reluctant to accept international assistance.

Officials in Brussels are reported to have been looking at the conditions of the European Union's existing bailout fund, the European Financial Stability Facility. At a summit meeting in Brussels last July, EU leaders approved a measure allowing the bailout funds to lend money to recapitalize banks in countries that are not already receiving bailouts — such as Spain.

The money would have to be funneled through the government. But because the money is meant to help troubled financial institutions rather than the government, the conditions attached to the bailout loan would not have to be as over-arching as those attached to government bailouts, such as in Greece and Ireland.

Instead, according to the guidelines adopted in July, they could be "more focused."

However, the country in question would be ultimately responsible for repaying the loan, and would have to show that its economic policies are sound enough to allow it do to that.

Economy Minister Luis de Guindos said Wednesday that a decision on recapitalizing the sector would be made after two international auditing firms contracted to pinpoint the extent of the troubled banks' problems issue their reports at the end of the month. An IMF report on the banks will be completed next Monday.

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Alan Clendenning and Daniel Woolls in Madrid, Don Melvin in Brussels and Juergen Baetz in Berlin contributed to this report