Spain told to get a grip of bank crisis as bailout looms large

ECB chief launches broadside at indecisive government as panic takes hold in Madrid and Rome

ECB President Mario Draghi hit out at the Spanish government (Reuters)

Spain and Italy last night seemed to be moving closer to the danger zone where a bailout by the European Union and the International Monetary Fund becomes unavoidable.

The interest rate on 10-year sovereign bonds of both recession-struck nations, after dropping yesterday morning, spiked up in the afternoon. Last night it cost Spain 6.6 per cent to borrow for 10 years. Italy's equivalent costs were 6 per cent. The price of insuring the debt of both nations also rose, in a sign of increasing investor anxiety, with the Credit Default Swap rate on 5 year Spanish debt hitting a record high.

The markets' nerves were shredded against a backdrop of increasing discord among European politicians and policymakers over how to handle the single currency's spiralling economic and financial crisis. Mario Draghi, the President of the European Central Bank (ECB), launched a withering attack on the Spanish government for consistently failing to get to grips with the problems in its banking sector.

"There is a first assessment, then a second, a third, a fourth," Mr Draghi said in the European Parliament. "This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost."

Last week the Spanish government announced plans to inject a further $19bn into Bankia, the country's fourth largest lender, which has been crippled by bad loans to the nation's collapsed property sector. An independent audit of Spain's banks, which are estimated by some analysts to be stuffed with more than €100bn of bad loans, is underway and will report next month. The audit is widely expected to announce that many of Spain's other lenders need significant capital injections too.

The fear of investors is that the Spanish government will be unable to afford to rescue its banks, forcing the country to apply for help from the €500bn European bailout fund and the IMF.

Earlier this week Spain floated a plan to shore up Bankia by issuing the bank directly with its own sovereign bonds, which would allow the lender to swap these securities for euro loans at the ECB. But the ECB said earlier this week that it had not been consulted on any such plan. Analysts have also pointed out that this would merely make Spain's banks more vulnerable by tying their fate even more closely with a Spanish government that is in danger of being frozen out of the capital markets.

The severe austerity measures being pushed through by Spain and Italy, under strong pressure from other European states, seems to be deepening their respective recessions. Spain is forecast by the OECD think tank to contact by 1.6 per cent this year. Italy's economy is seen contracting by 1.7 per cent in 2012. Unemployment levels in Spain have hit 25 per cent. In Italy the rate is 9.8 per cent. This prompted the Italian Prime Minister, Mario Monti, to warn yesterday of a potential social "backlash" against the cuts being forced through in the teeth of recession.

"We have to be mindful of the sustainability of fiscal discipline and the reform process" he said. "It is obvious that there is going to be, sooner or later, a backlash against fiscal and structural reform".

The Spanish government is believed to be keen to avoid a formal national bailout since this would come with strict controls on its taxation and spending policies. Instead, Madrid is believed to have been pressing for the European bailout fund, the European Stability Mechanism, to commit funds to recapitalise Spain's banks directly.

Spanish ministers have also called on the European Central Bank to resume its purchases of the country's bonds in order to hold down the country's borrowing rates. Spain's Deputy Prime Minister, Soraya Saenz De Santmaria, flew to Washington for talks at the International Monetary Fund yesterday. But both sides denied that the trip was a prelude to a Spanish bailout.

Greek man who could take no more

The suicide note found on the body of a man who was discovered hanging from a tree in an Athens park yesterday called for a politician like Margaret Thatcher to take control of Greece's desperate situation.

"I hope my grandchildren will never be born in Greece because from now on it won't be populated by Greeks any more," wrote the man, identified as Alexandros, a 61 year-old father of two who owed money to the banks and the tax office. "At least they will know a foreign language as Greek will be abolished by then unless there is a politician with balls, like Thatcher, to fix both us and the state."

The death comes two months after a pensioner shot himself dead in the main square in Athens, in protest at Greece's austerity measures.

Alistair Dawber

Quake hits Italian economy hard

This week's earthquake in Emilia-Romagna, one of Italy's richest and most productive regions, has cast a further shadow over the country's moribund economy.

The Italian employers' organisation, Confindustria, estimates the 5.8-magnitude tremor, which has destroyed or temporarily closed about 3,500 businesses, will cost the region 1 per cent of its annual output. Emilia-Romagna, famous for prosciutto ham, Parmesan cheese and Ferrari cars, contributes about 10 per cent of Italy's GDP, so the effects of the quake, the second to hit area in as many weeks, are likely to be significant at a national level.

The cost of damage in quake-struck Emilia, between Bologna to the south and the Po river to the north, has been put at €2bn (£1.6bn).

Michael Day