Spain thrown lifeline by Brussels with extra year to cut deficit

Relief for Madrid as fears over banks see country's borrowing costs at their highest since it joined euro

Beleaguered Spain was handed a lifeline by the European Commission yesterday as the nation was given an extra year to slash its deficit.

The relief for Spain – in the grip of a double-dip recession and record unemployment of 5.64 million – came as fears over its struggling banks pushed Madrid's borrowing costs up to 6.67 per cent, the highest since the country joined the euro.

The latest panic sent investors running for cover across Europe as Italy took a fresh hammering in bond markets, and the euro plunged to a new, two-year low of $1.2407 against the dollar.

Under the terms of the fiscal pact, Spain is obliged to cut its deficit to 3 per cent in 2013, forcing a brutal €27bn (£21.5bn) in budget cuts from Prime Minister Mariano Rajoy's centre-right administration. But these targets are widely seen as optimistic given Spain's economic woes. The commission's economic and monetary affairs commissioner, Olli Rehn, said Spain would be given an extra year to meet the target, subject to controls on spending.

Mr Rehn said: "We are ready to consider proposing an extension of the deadline to correct the excessive deficit."

The relaxation of deficit targets came amid fresh concerns over Spain's banks as the European Central Bank insisted that it was up to individual nations to strengthen bank balance sheets.

"The funds needed to ensure banks' compliance with capital requirements, cannot be provided by the eurosystem," the ECB said.

The rare intervention from the ECB scotched reports that Spain was planning to recapitalise its fourth-biggest bank, Bankia, with government bonds which could be swapped for central bank cash.

Spain now has to throw itself on the mercy of the debt markets to prop up its ailing banking system. Many of its regions, including wealthy Catalonia, are adding to the pressure and demanding a central government bailout to refinance their debts.

Spain's banks – laden with €184bn in struggling property loans – have taken centre-stage in the crisis, although the threat of a Greek pullout of the euro is still hanging over the markets ahead of elections on 17 June.

The commission's latest assessment of Spain warned that its worsening economy could "require further strengthening of the capital buffers of banks", and warned that other vulnerabilities in the system – such as exposures on loans to small business and residential mortgages – "have not been addressed".

Spain's stock market crashed 1.9 per cent to nine-year lows in a torrid day for European shares which saw France's Cac 40 and the FTSE 100 slide 1.7 per cent, and Germany's Dax fall 1.4 per cent. London's blue-chip benchmark is now on course for its worst month since last August when the latest dangerous phase of the debt crisis erupted.

Italy was forced to pay 6.03 per cent to borrow for 10 years as it raised €5.7bn from turbulent bond markets, the highest rate of interest since its January auction. Investors instead flooded cash into safe-haven assets as Germany's cost of borrowing sank to an all-time low and yields on US Treasuries – the world's ultimate, risk-free asset – skirted with 60-year lows seen in September.

PROMOTED VIDEO
Life and Style
The veteran poverty campaigner Sir Bob Geldof issues a stark challenge to emerging economies at the Melbourne HIV/Aids conference
health
Arts and Entertainment
Benedict Cumberbatch and John Malkovich talk Penguins of Madagascar at Comic-Con
comic-con 2014Cumberbatch fans banned from asking about Sherlock at Comic-Con
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
filmGuardians Of The Galaxy should have taken itself a bit more seriously, writes Geoffrey Macnab
News
Sir Chris Hoy won six Olympic golds - in which four events?
news
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Lars Ulrich of Metallica performs on the Pyramid Stage at Glastonbury 2014
people
Arts and Entertainment
film
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
video
Life and Style
tech
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Graduate Recruitment Resourcers - Banking Technologies

£18000 - £25000 per annum + OTE £40,000: SThree: Huxley Associates are looking...

Associate Recruitment Consultant - IT

£20000 - £25000 per annum + OTE £40,000: SThree: Computer Futures has been est...

Business Analyst

£300 - £350 per day: Orgtel: Job Title: Business Analyst Rate: £300 - £350 per...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform