Germany could cave in and support Spain to prevent a banking collapse

By David Maddox
Published on 20/06/2012 01:36

GERMANY was last night poised to step in to help prevent a collapse of the Spanish banking system as part of the plan being drawn up by G20 leaders to stabilise the eurozone.

As Spain’s cost of borrowing hit new record levels yesterday, the German government appeared to be preparing to provide more bail-out money for the troubled Spanish banks.

The level of the crisis in Spain was demonstrated yesterday as rates on short-term Spanish debt soared in a bill auction, highlighting investor concerns that the country might eventually need foreign help.

The Spanish Treasury raised €3.39 billion in 12- and 18-month bills. But while demand was strong it came at a cost with interest rates shooting up, increasing the pressure on Germany to step in to help.

The interest rate on the 12-month bills shot up to 5.07 per cent from 2.98 per cent at the last such auction on 14 May. The rate on the 18-month bills soared to 5.10 per cent from 3.3 per cent.

Worries about Spain’s ability to repay its debt grew last week, when the country accepted a European loan of up to €100bn to shore up its ailing banks, which are sitting on massive amounts of soured real estate investments. The big fear is that, as the money will count as a loan and raise Spain’s overall debt load, the country’s financing costs will suffocate the government as it tries to wade its way through a money-sucking recession.

Spain can survive the current high interest rates for weeks, analysts say, but not in the longer term. If it becomes clear that the borrowing rates will not come back down, Spain will probably have to ask for a European bail-out – which would come at lower interest rates than those offered by bond markets.

The Spanish economy minister, Luis de Guindos, attending the Group of 20 world leaders’ summit in Mexico, said the country is being punished unfairly in debt markets. “This is something that will have to be recognised in the coming days and weeks.”