Spanish Prime Minister Mariano Rajoy on Wednesday warned that his country will not be able to finance itself for long at the high rates it is currently paying for raising funds from the markets. He urged the European Union to move quickly to bring the rates to sustainable levels.
"The most urgent subject is the subject of financing. We can't finance ourselves at the prices we are paying for very long. There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries," Rajoy told the Spanish parliament on Wednesday.
Rajoy's remarks came as Spanish government's 10-year bonds traded at yields of more than 6.8 per cent, close to the crucial 7 percent mark seen as unsustainable by analysts. The high yields were prompted by concerns about the outlook for the eurozone ahead of a crucial 2-day summit of EU leaders due to begin in Brussels on Thursday.
On Monday, the Spanish government made a formal request for bailout aid from the European Union to shore up its ailing banking sector. Fellow eurozone nations like Greece, Ireland and Portugal have already availed such loans provided jointly by the EU, ECB and IMF in exchange for implementing stringent austerity measures. Later on Monday, Cyprus also joined the bandwagon for financial assistance from the euro area's bailout funds to shore up its banks.
Incidentally, Italy's borrowing costs also increased on Wednesday amidst growing concerns whether the country would be the next in line to seek a bailout.
The developments come a day ahead of the opening of a two-day summit of EU leaders in Brussels Thursday. Discussions on various ways to tackle the ongoing debt crisis in the eurozone, including Eurobonds, Eurozone banking union and a growth pact, are likely to dominate the summit.
The meeting is also expected to discuss making changes to conditions of the Greek bailout. Political uncertainty in Greece is still a concern as the new finance minister resigned on Monday citing ill health. With the election of a new government, the risk of 'Grexit' has been avoided only for the near term, but it still remains a threat.
On Tuesday, European Union authorities unveiled proposals for securing the stability of the Union by enforcing tighter fiscal integration with budget controls across the eurozone and establishing a European banking union. The proposed measures would enhance the existing power of European Union in Brussels over the fiscal policies of the eurozone member-states.
On top of the agenda would be the issue of collective bonds by all eurozone member states to keep borrowing costs down for nations currently facing unaffordable debt as part of a 10-year plan. The proposal is aimed at closer fiscal integration has already triggered strong opposition from Germany. The idea of issuing collective eurobonds has the backing of France as well as Italy, the second and third largest eurozone economies after Germany.
Nevertheless, German Chancellor Angela Merkel reportedly dismissed the idea on Wednesday itself, saying: "I don't see total debt liability as long as I live." Incidentally, she has said earlier that the idea of eurobonds was "economically wrong and counterproductive".
by RTT Staff Writer
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