Spain's economy on cliff edge as bank's shares dive

Spanish 10-year borrowing costs neared the 7% danger level and Bankia shares hit record lows yesterday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender.  Prime Minister Mariano Rajoy pinned the blame for rising borrowing costs - the spread over Germany reached the highest since the euro's launch - on concern about the future of the single currency. He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust. "There are major doubts over the eurozone and that makes the risk premium for some countries very high. That's why it would be a very good idea to deliver a clear message there's no going back for the euro," Rajoy said. "There will not be any [European] rescue for the Spanish banking system." He gave no details of bank recapitalisation plans but backed calls for the eurozone bailout fund, which will be in place from July. The government said Spain might shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders - moves which would push the country's debts above the 79.8% of economic output. The source said the European Central Bank had not been specifically informed of the plans to inject state bonds into Bankia. A final decision had not yet been made on which option to take. Bankia's parent company, BFA, has asked for à19-billion in government help, in addition to à4.5-billion the state has already pumped in to cover possible losses on repossessed property, loans and investments. Investors believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout, which the eurozone can barely afford. The premium investors require to hold Spanish government bonds over German counterparts hit a euro-era high at 505 basis points, denoting a lack of confidence in Madrid's efforts to stabilise its finances and ailing banks. Having dropped to about 4.7% earlier this year, helped by the ECB's creation of a glut of three-year money, 10-year borrowing costs are now approaching 6.5% and closing in on the 7% level widely seen as unsustainable. Ireland and Portugal were frozen out of capital markets and forced to seek international bailouts soon after their yields topped 7%.

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