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.

Start your day with The Independent, sign up for daily news emails
News
Kim Wilde began gardening in the 1990s when she moved to the countryside
peopleThe singer is leading an appeal for the charity Thrive, which uses the therapy of horticulture
Sport
Alexis Sanchez celebrates scoring a second for Arsenal against Reading
football
Life and Style
health
Voices
An easy-peel potato; Dave Hax has come up with an ingenious method in food preparation
voicesDave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
News
i100
News
Japan's population is projected to fall dramatically in the next 50 years (Wikimedia)
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
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

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own