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

PROMOTED VIDEO
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
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

SQL Developer (TSQL, SSRS, SSAS) Fund Manager - London

£45000 - £50000 per annum + Benefits: Harrington Starr: SQL Developer (TSQL, S...

Software Developer (JavaScript, TDD, Jasmine, Angular.JS)

Negotiable: Harrington Starr: Software Developer (JavaScript, TDD, Jasmine, An...

Front-End UI/UX Developer (HTML5, CSS, JavaScript, jQuery, Ang

£45000 - £50000 per annum + Benefits + Bonus: Harrington Starr: Front-End UI/U...

C#.NET Server Side Developer (C#, XML, WCF, Unit Testing,SQL)

£30000 - £40000 per annum + benefits+bonus+package: Harrington Starr: C#.NET ...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
What happens to African migrants once they land in Italy during the summer?

What happens to migrants once they land in Italy?

Memphis Barker follows their trail through southern Europe
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

Frank Mugisha: 'Coming out was a gradual process '

Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

Florence Knight's perfect picnic

Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

Horst P Horst comes to the V&A

The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

Mark Hix's summery soups

Soup isn’t just about comforting broths and steaming hot bowls...
Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

Tim Sherwood column

I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
Eden Hazard: Young, gifted... not yet perfect

Eden Hazard: Young, gifted... not yet perfect

Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
Tim Howard: I’m an old dog. I don’t get too excited

Tim Howard: I’m an old dog. I don’t get too excited

The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition