Bank bailout fails to ease fears for Spain

A fish market in Pamplona, northern Spain. The eurozone's fourth-biggest economy, Spain is looking to emerge from a death spiral, with a shaky banking system being propping up by the indebted government so that banks could buy more government debt.
A fish market in Pamplona, northern Spain. The eurozone's fourth-biggest economy, Spain is looking to emerge from a death spiral, with a shaky banking system being propping up by the indebted government so that banks could buy more government debt. (ALVARO BARRIENTOS / Associated Press)
By Don Melvin and Daniel Woolls and associated press
Posted: July 21, 2012

BRUSSELS — Concerns about Spain's crippling financial problems flared again Friday as even news that the country had been approved for a bank bailout loan of up to $122.9 billion failed to blunt bad economic news.

Earlier Friday, finance ministers from the 17 countries that use the euro unanimously approved the terms for a bailout loan for Spain's banks. The banks have been burdened by toxic loans and assets from the collapse of Spain's property market. Investors have for months worried that Spain could not control its deficit during a recession while supporting its stricken financial sector.

Spain is the eurozone's fourth-biggest economy. Many market watchers fear that if it asked for a bailout, the rest of the region could not afford the bill. The country and its banks also have been locked in a debt spiral, where the shaky banking system has been propped up by the indebted government so that the banks could buy more government debt. The loan facility agreed to on Friday was designed to break that spiral.

The bank agreement came as Spain cut its growth forecast and one of the country's heavily indebted regions asked for help. The news sent Spain's borrowing costs soaring. The interest rate on the country's 10-year bond was at 7.2 percent. Many market watchers consider that too costly a rate for a country to pay in the long term.

Treasury Minister Cristobal Montoro on Friday forecast Spain's recession would drag on into 2013, although the economy will not be quite as weak as it is now. The country's gross domestic product is expected to contract 0.5 percent in 2013, compared with the previous forecast for growth of 0.2 percent.

Also Friday, the region of Valencia disclosed that it would become the first to tap a fund designed to help out Spain's 17 semi-autonomous regions. Many Spanish regions are so heavily in debt that they cannot raise money at affordable rates.

In Italy, Premier Mario Monti admitted Friday that the eurozone debt crisis had spread to Italy and that the country must try to avoid taking a bailout.

He emphasized that Italy does not need further budget measures to raise revenue and shore up public finances.

Monti was asked to form a government late last year after weeks of market turmoil over Italy's stagnant growth and high public debt — which at $2.6 trillion is nearly 120 percent of GDP — forced the previous prime minister, Silvio Berlusconi, out of office.

Italy's borrowing costs have risen steadily in recent weeks due to fears that the government will not be able to handle such a high debt load as the country's economy stagnates.

Many of the country's debts are due soon. On Friday, the 10-year bond yield was up 0.25 percentage points at 6.15 percent.

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