Eurozone crisis deepens as Spain haggles over terms of bailout

Mario Draghi, head of the ECB, said the bank should not be making up for politicians' shortcomings (Getty Images)

The eurozone sovereign debt emergency showed no signs of abating yesterday as the Spanish government haggled over the terms of its expected bailout and the European Central Bank refused to ease monetary policy for the currency bloc, despite signs of stricken European economies sinking deeper into recession.

Madrid's Economy Minister, Luis de Guindos, insisted once again he was not making any plans to follow Greece, Portugal and Ireland in requesting a bailout from the European Union and the International Monetary Fund. But, behind the scenes, Spanish ministers accept that an external rescue of the country's beleaguered banking sector is now necessary.

Spain is trying to persuade its European partners to allow the European bailout fund to inject capital directly into its banks, rather than diverting the money through the state. Madrid fears that a full-blown national bailout would be accompanied by an onerous EU/IMF inspection system.

This idea, however, has met opposition from some senior German politicians, who have insisted that bailouts must be paid to countries rather than financial institutions to guarantee full accountability. A possible compromise under discussion was a national bailout with minimal conditions.

Separately, Spain's public prosecutor's office opened an investigation into its fourth-largest lender, Bankia, yesterday. Bankia was formed through a merger of seven troubled smaller banks and many small shareholders, who were encouraged to provide the new lender with equity, have seen much of their investment wiped out. Bankia said it needs €19bn in new capital.

The IMF is due to report next week on how much capital the rest of Spain's banking sector requires. Analysts say the full recapitalisation needs of Spain's banks could be more than €100bn.

There were also signs of increasing strain in the Spanish economy yesterday as figures showed industrial production falling at the fastest rate in more than two years. Spain is in a double-dip recession, with unemployment at 24 per cent, and the European Commission has forecast Spain's economy will contract by 1.8 per cent over 2012.

Meanwhile, in Frankfurt, the European Central Bank held interest rates at 1 per cent. And the ECB's president, Mario Draghi, disappointed markets by downplaying hopes of another mass liquidity operation for Europe's banks, or a restart of the ECB's sovereign-bond buying operation.

The ECB cut its forecast for the eurozone over 2012 from 0.1 per cent growth to a 0.1 per cent contraction.