The euro zone is looking decidedly less stable this morning as Spain's budget minister calls on Europe to shore up its debt-ridden banks—a move Spanish leaders had insisted just a week ago wouldn't be necessary. "What we need is for the European institutions to get going and seek that bank recapitalization through those procedures that mean more Europe," said Budget Minister Cristobal Montoro in an interview with Spanish network Onda Cero. The plea for help is an admission that Spain is being shut out of credit markets as borrowing costs soar for the troubled country. Already, financial watchers say the call for help will have an impact on how EU leaders manage the continent's debt problems as a whole.
What's wrong with Spain? The essential problem with Spain, which is still suffering the effects of a housing crisis, is it needs to refinance its debt but no one is confident enough in its banks. As The Wall Street Journal's David Roman reports, the matter became urgent "after Madrid was forced into a €19 billion ($23.75 billion) rescue of lender Bankia SA, while the government's borrowing costs have surged to record highs with yields on Spanish 10-year bonds staying above the 6 percent mark for the third straight week." Montoro explained in the radio interview, "Spain as a whole, has a problem when it comes to accessing markets, when we need to refinance our debt ... Spain doesn't have the market's door open, as such, the challenge is to open that door and regain the confidence of those markets, our creditors."
What are they asking for? So far, Spain isn't asking for a full-blown financial bailout but it does want assistance in the form of direct aid from European Union institutions to its banks. There are a lot of different ways experts say Europe could help out Spain. In his interview, Montoro suggested European institutions directly recapitalize banks instead of taking them over. How much money do Spain's banks need? Bloomberg reports that Santander Chairman Emilio Botin said Monday that "about 40 billion euros ($50 billion) of European funds for four seized lenders including Bankia group would be enough to solve the industry’s problems." Adding to that, Juan Carlos Ureta, chairman of Renata 4 Banco SA, said this is the best shot at keeping Spain afloat. “Using the mechanisms for assistance from Europe or the IMF is the best option and more and more the banking industry is taking that view,” he said.
What's the catch? According to some financial observers, Germany, which has been reluctant to bailout European countries, may use the opportunity to push for more centralized European control of the economies of European nations while agreeing to help Spain. "Germany got its wish," writes econoblogger Tyler Durden at Zero Hedge. "It got Spain to admit it is broke. Just as it wanted -- because remember: all Germany is, is a true lender of last resort unlike the ECB: after all they are the decision makers. And Germany knows very well that it needs Europe desperate when it is forced to accept any conditions to the German DIP loan that Schrodinger Schauble proposes." In a grand bargain revealed yesterday, Germany chancellor Angela Merkel indicated that she would be willing to "provide greater support for its most indebted euro zone partners in exchange for more centralized control over government spending in Europe," reported The New York Times' Nicholas Kulish. Will another rescue package for a European country seal the deal?