Spain's deputy prime minister rushed to Washington for top-level talks over
the struggling nation's economic turmoil yesterday as Italy's top banker warned of
a crisis of confidence over the euro.
The pressure on Spain eased slightly today after rising panic over its ability to rescue its crippled banks without outside help sent investors rushing for safety yesterday. But borrowing costs still remain at 6.49 percent worryingly close to the 7 percent mark seen as the trigger-point for a bailout.
Spain's deputy prime minister Soraya Saenz de Santamaria held talks with US Treasury Secretary Timothy Geithner and IMF director general Christine Lagarde, to outline measures to tackle its crisis, although Madrid insisted that the meeting was scheduled before the latest market unrest.
European shares clawed back some ground from yesterday's sell-off but Bank of Italy governor Ignazio Visco warned that leaders should chart a clear path towards political union and said: "There are now growing doubts among international investors about governments' cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency."
Italian prime minister Mario Monti also warned of the "huge possibilities" of contagion from the debt crisis as well as a "backlash against fiscal and structural discipline."
Spain -- whose banks are laden with euro 184 billion (pounds sterling 147 billion) in bad property debts -- has been given an extra year to cut its deficit target by the European Commission. ECB president Mario Draghi today hinted that Europe's new bailout fund, the European Stability Mechanism, could be used to recapitalise the banks, saying he was a "little more optimistic" that the euro 700 billion mechanism will be used.
Draghi said: "The issue is not so much if ESM money could be used to recapitalise banks, but whether this could be done directly without having to go through governments."
Eric Wand, analyst at Lloyds Bank Corporate Markets, said: "It's becoming increasingly likely that some form of ESM assistance will be provided but it can't recapitalise banks at the moment without being changed and I can't imagine there is the political harmony to do that."
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