Eurozone crisis live: Fears grow over Spain as banking crisis deepens

City analysts fear that the Spanish government may need international help, with its borrowing costs hovering at worryingly high levels

8.10am: Some grim economic news from Spain was just released – retail sales slumped by 9.8% in April, on a year-on-year basis. That’s a record fall (based on data going back to 2004), and indicates that the financial crisis is now hitting consumer spending hard, with Spain now officially in recession.

8.03am: Spain’s problems are well-covered in today’s UK newspapers.

Our own Giles Tremlett reported from Madrid that prime minister Mariano Rajoy warned that Spain “would fall” if it allowed any bank to collapse. The news late last night that Bankia had reported the biggest loss in Spain’s banking history added to concerns over Spain:

Nervousness that other Spanish banks may be hiding similar-sized holes saw Spain’s borrowing costs soar once more, with investors demanding 6.5% interest on future 10-year debt. That took the rate dangerously close to the unsustainable levels at which other eurozone countries such as Portugal had to request a bailout.

In the Daily Telegraph, Ambrose Evans-Pritchard warns that Rajoy has given “a fateful hostage to fortune” by pledging that Spain’s banking sector will not need a bailout.

Whether Mr Rajoy can keep his pledge depends on the ferocity of Spain’s double-dip recession. Credit has contracted for eighteen months. Madrid expects the economy to shrink by 1.7pc this year but it could be worse as Mr Rajoy tries to slash the budget deficit from 8.9pc to 5.3pc of GDP in a single year.

Barclays Capital says Spain’s housing crash is only half way through. Home prices will have to fall another 20pc to clear an overhang of one million excess properties. That will bleed banks to death.

The Centre for European Policy Studies puts likely write-offs at €270bn. Much of the loss would land on the state, as in Ireland. The risk is that Spain’s public debt will surge above 100pc of GDP.

And the Wall Street Journal argues that Rajoy must move swiftly and pick one of the ‘bad choices on offer:

Someone is going to have to recapitalize Spain’s banks. With the country now again in recession, its problem real-estate loans—currently at €17.9 billion for Bankia alone—look set to get worse. Bankia itself is the newly created product of the last government’s attempt to grapple with the losses in its fragmented, but politically influential, cajas. These small regional lending banks controlled most of Spain’s banking market, and the idea behind Bankia was to roll them up into an entity large enough to stand on its own.

Clearly that hasn’t worked. The €19 billion that Bankia now says it needs is well in excess of the value of its equity. If taxpayers are going to put €19 billion into Bankia, then its equity holders deserve to be wiped out and its management replaced. Better that than throwing more good money after bad and letting a zombie bank survive on government life-support to make the costs look lower for the moment.

7.50am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Today, Spain has elbowed Greece out of the spotlight (for now), as concerns grow over its ability to avoid seeking outside help. Rising bond yields, escalating bank bailout costs, and a shrinking economy risk becoming a toxic combination. Prime minister Mariano Rajoy insisted yesterday that the country will not need a bailout, and will not allow a bank or region to fail, but some financial analysts scent serious trouble ahead.

Elsewhere today, Italy will sell €8.5bn of short-term debt (six-month bills), and updated German inflation data will be released this afternoon.

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