Spain told to get a grip of bank crisis as bailout looms large

ECB chief launches broadside at indecisive government as panic takes hold in Madrid and Rome

Spain and Italy last night seemed to be moving closer to the danger zone where a bailout by the European Union and the International Monetary Fund becomes unavoidable.

The interest rate on 10-year sovereign bonds of both recession-struck nations, after dropping yesterday morning, spiked up in the afternoon. Last night it cost Spain 6.6 per cent to borrow for 10 years. Italy's equivalent costs were 6 per cent. The price of insuring the debt of both nations also rose, in a sign of increasing investor anxiety, with the Credit Default Swap rate on 5 year Spanish debt hitting a record high.

The markets' nerves were shredded against a backdrop of increasing discord among European politicians and policymakers over how to handle the single currency's spiralling economic and financial crisis. Mario Draghi, the President of the European Central Bank (ECB), launched a withering attack on the Spanish government for consistently failing to get to grips with the problems in its banking sector.

"There is a first assessment, then a second, a third, a fourth," Mr Draghi said in the European Parliament. "This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost."

Last week the Spanish government announced plans to inject a further $19bn into Bankia, the country's fourth largest lender, which has been crippled by bad loans to the nation's collapsed property sector. An independent audit of Spain's banks, which are estimated by some analysts to be stuffed with more than €100bn of bad loans, is underway and will report next month. The audit is widely expected to announce that many of Spain's other lenders need significant capital injections too.

The fear of investors is that the Spanish government will be unable to afford to rescue its banks, forcing the country to apply for help from the €500bn European bailout fund and the IMF.

Earlier this week Spain floated a plan to shore up Bankia by issuing the bank directly with its own sovereign bonds, which would allow the lender to swap these securities for euro loans at the ECB. But the ECB said earlier this week that it had not been consulted on any such plan. Analysts have also pointed out that this would merely make Spain's banks more vulnerable by tying their fate even more closely with a Spanish government that is in danger of being frozen out of the capital markets.

The severe austerity measures being pushed through by Spain and Italy, under strong pressure from other European states, seems to be deepening their respective recessions. Spain is forecast by the OECD think tank to contact by 1.6 per cent this year. Italy's economy is seen contracting by 1.7 per cent in 2012. Unemployment levels in Spain have hit 25 per cent. In Italy the rate is 9.8 per cent. This prompted the Italian Prime Minister, Mario Monti, to warn yesterday of a potential social "backlash" against the cuts being forced through in the teeth of recession.

"We have to be mindful of the sustainability of fiscal discipline and the reform process" he said. "It is obvious that there is going to be, sooner or later, a backlash against fiscal and structural reform".

The Spanish government is believed to be keen to avoid a formal national bailout since this would come with strict controls on its taxation and spending policies. Instead, Madrid is believed to have been pressing for the European bailout fund, the European Stability Mechanism, to commit funds to recapitalise Spain's banks directly.

Spanish ministers have also called on the European Central Bank to resume its purchases of the country's bonds in order to hold down the country's borrowing rates. Spain's Deputy Prime Minister, Soraya Saenz De Santmaria, flew to Washington for talks at the International Monetary Fund yesterday. But both sides denied that the trip was a prelude to a Spanish bailout.

Greek man who could take no more

The suicide note found on the body of a man who was discovered hanging from a tree in an Athens park yesterday called for a politician like Margaret Thatcher to take control of Greece's desperate situation.

"I hope my grandchildren will never be born in Greece because from now on it won't be populated by Greeks any more," wrote the man, identified as Alexandros, a 61 year-old father of two who owed money to the banks and the tax office. "At least they will know a foreign language as Greek will be abolished by then unless there is a politician with balls, like Thatcher, to fix both us and the state."

The death comes two months after a pensioner shot himself dead in the main square in Athens, in protest at Greece's austerity measures.

Alistair Dawber

Quake hits Italian economy hard

This week's earthquake in Emilia-Romagna, one of Italy's richest and most productive regions, has cast a further shadow over the country's moribund economy.

The Italian employers' organisation, Confindustria, estimates the 5.8-magnitude tremor, which has destroyed or temporarily closed about 3,500 businesses, will cost the region 1 per cent of its annual output. Emilia-Romagna, famous for prosciutto ham, Parmesan cheese and Ferrari cars, contributes about 10 per cent of Italy's GDP, so the effects of the quake, the second to hit area in as many weeks, are likely to be significant at a national level.

The cost of damage in quake-struck Emilia, between Bologna to the south and the Po river to the north, has been put at €2bn (£1.6bn).

Michael Day

Start your day with The Independent, sign up for daily news emails
News
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Life and Style
fashion
Arts and Entertainment
tv
News
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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 General

Recruitment Genius: Account Manager

£20000 - £35000 per annum: Recruitment Genius: This full service social media ...

Recruitment Genius: Data Analyst - Online Marketing

£24000 - £35000 per annum: Recruitment Genius: We are 'Changemakers in retail'...

Austen Lloyd: Senior Residential Conveyancer

Very Competitive: Austen Lloyd: Senior Conveyancer - South West We are see...

Austen Lloyd: Residential / Commercial Property Solicitor

Excellent Salary: Austen Lloyd: DORSET MARKET TOWN - SENIOR PROPERTY SOLICITOR...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there