SPAIN has made its most explicit call to date for European institutions to recapitalise the country's banks amid concerns about its own ability to raise the billions of euro needed on sovereign bond markets.
Cristobal Montoro, budget minister in the centre-right government, sent jitters through financial markets yesterday when he admitted that the high perceived risk of Spanish sovereign debt meant Spain "does not have the door to the markets open".
The comment startled analysts given that the Spanish treasury plans to auction up to €2bn of bonds tomorrow.
Mr Montoro sent out the dramatic distress signal about the impact of his country's banking crisis on government borrowing, saying that at current rates, financial markets were effectively shut to Spain.
"The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt," Mr Montoro said.
Spain is beset by bank debts triggered by the bursting of a real estate bubble in 2008, aggravated by overspending by its autonomous regions.
Mr Montoro said Spanish banks should be recapitalised through European mechanisms, departing from the previous government line that Spain could raise the money on its own and prompting the Madrid stock market to rise.
But his comments on Spain's borrowing sent the euro down after it earlier hit a one-week high against the dollar on hopes that a conference call of G7 finance ministers and central bankers might hasten action.
The US Treasury, which chaired that meeting, said in a statement that the G7 discussed "progress towards a financial and fiscal union in Europe" and agreed to monitor developments closely. But the group made no joint statement and took no immediate action.
Japanese Finance Minister Jun Azumi said the G7 finance chiefs agreed to work together to deal with the problems facing Spain and Greece, but he gave no details.
"I see market anxiety over the world economy largely stemming from Europe's problems," Mr Azumi told reporters.
"Leaders of major European countries voiced strong comments, saying that they would tackle the problems responsibly, including Spain, so we trust Europe's response."
European leaders, alarmed by the latest turn of events, have begun thinking seriously about the economic union needed to make the single currency project secure. But that endgame is months or years away.
"What we have learnt since the weekend is that all the talk about a bigger solution, a bigger response from the politicians is gaining some steam," said Rainer Guntermann, strategist at Commerzbank in Frankfurt.
"At the same time it doesn't look like they have a quick fix at hand, not a fundamental game changer at this point in time.
"They don't want to. They are too proud. It's fatal hubris," a source said of the Spanish government.
Berlin and the ECB have so far resisted pressure from Madrid to ride to its rescue without forcing Spain into the humiliation of an internationally supervised bailout.
French Foreign Minister Laurent Fabius said Europe must find a solution to the Spanish banking crisis that did not add to Madrid's budget deficit.
The ECB holds its monthly rate-setting meeting today and EU leaders meet on June 28-29 to discuss a strategy for overcoming the crisis.
Investors have fled peripheral eurozone sovereign debt amid worries about Spain's banking crisis and fears that a June 17 Greek election could lead to Athens leaving the euro, setting off a wave of contagion around the eurozone.
Emilio Botin, chairman of the nation's biggest bank, Banco Santander, said Spanish banks needed about €40bn in additional capital, adding that "there is no financial crisis in Spain".
Mr Montoro said the bank recapitalisation figures were "perfectly accessible" but analysts were perplexed about his comments on Spain's ability to raise debt.
Mr Montoro's comments appeared aimed at pressuring the ECB and EU paymaster Germany to find ways of intervening. But the central bank has so far shunned calls to resume purchases of Spanish government bonds, and Berlin has rejected allowing direct aid from the eurozone's rescue fund to recapitalise Spanish banks without setting conditions.
The festering eurozone crisis has sparked mounting concern outside Europe. Pressure is building in particular on Germany, the biggest contributor to eurozone rescue funds, to back away from its prescription of fiscal austerity for the region's weaker economies and to work harder on fostering growth.
Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and agreeing that Spain should have more time to achieve its fiscal targets.