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Spanish Prime Minister Rajoy defends attempts to shore up banks

SPANISH prime minister Mariano Rajoy has defended his government's attempts to shore up the country's troubled financial sector, blaming the previous Socialist administration for failing to deal with the problem in 2009.

During a parliamentary debate on the offer of a loan of up to €100bn from the 17 eurozone countries - and the lack of a definite plan from the government on how much money it will ask for - Mr Rajoy blamed then-governing Socialists for refusing to acknowledge Spain's banks were vulnerable over a property boom that went bust.

The interest rate Spain must now pay for 10-year bonds is at a high rate of 6.63pc, meaning the country cannot afford to borrow and do the job on its own, Mr Rajoy told parliament.

There is growing concern that as the country finds fewer and fewer international buyers for its bonds, an increasingly large amount of Spanish government debt is being bought by its banks.

As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it harder to sell its bonds.

One hope among eurozone politicians is that the 100 billion euro loan facility will help shore up Spanish banks' balance sheets, giving them back the freedom to loan out money to businesses and individuals - and also buy more government debt.

However, Spain is in danger of being trapped in a vicious circle of debt. The 100 billion euro loans will increase the government's debt load and the interest payments on them will add to its deficit, the European statistics agency Eurostat has confirmed.

That means Spain will have to find more buyers for its bonds - which could send borrowing costs even higher.

Spain does not have a particularly high debt-to-GDP ratio; at 68.5pc, it is far lower than even Germany's, which is 81.2pc.

But Spain is in a deep recession and has poor growth prospects, making it very difficult for it to reduce those debts - therefore, any trend upward is worrisome.

Also, the country does have a high deficit; at 8.9pc of GDP, it is among the highest in the eurozone.