By DANIEL WOOLLS, Associated Press
MADRID (AP) — The European Union urged Spain on Thursday to come clean on how it plans to finance the overhaul of its banking sector, warning that uncertainty over this has contributed the recent market turmoil and the country's soaring borrowing costs.
A European Commission spokesman, Amadeu Altafaj, told Spanish National Radio that the conservative government in Madrid needed to spell out quickly how it plans to finance the recapitalization of troubled lender Bankia SA and whether there are other banks burdened by toxic real estate assets that might need assistance.
The government nationalized Bankia earlier this month, and the €19 billion ($23.6 billion) in public money that will need to be injected is more than twice what the government had estimated.
Doubts over how recession-hit Spain will handle the bailout have sparked concerns that the country itself will soon follow Greece, Portugal and Ireland in asking for financial assistance. Spain's borrowing costs on the international debt markets — a sign of investor confidence in how well it can pay off its debt — have hit worrying levels while its stock prices have been taking a pounding.
"No one can expect that, with these negative results of some banks, the markets can react with euphoria," Altafaj said.
Spain's deputy prime minister was headed to Washington to discuss the economic crisis with the U.S. Treasury Secretary Tim Geithner and Christine Lagarde, the head of the International Monetary Fund, which has been involved in all previous sovereign bailouts in Europe.
But the IMF says it has not been asked by Spain for a bailout and has not begun preparing one. Saenz de Santamaria said that it was coincidental that she was coming to Washington in the midst of the banking crisis because her meetings were scheduled months ago.
Lagarde called her meeting with Saenz de Santamaria productive. She also denied a Wall Street Journal report that the IMF was drawing up plans for a rescue loan for Spain.
"There is no such plan," she said.
Saenz de Santamaria said that she discussed with Geithner some of the ideas being discussed in Europe about how to set up a fund to recapitalize European banks.
"The problem is not Spain as a country," she said. "But our financial system in a given moment has needs just like the other states had at other times."
Altafaj said it would be best if the Spanish government turned to capital markets to finance the clean-up of Bankia, the country's fourth largest bank, but stressed that if it is going to need external money it should say so soon.
"What you cannot do is maintain this uncertainty, which is what is dragging down market confidence," the spokesman said.
Speaking in Brussels Thursday, European Central Bank head Mario Draghi criticized national regulators — including Spain's — for choosing "the worst possible way" to help their banking sectors by delaying tough decisions.
Citing the example of Bankia's current bailout, Draghi hit out at Spanish banking authorities for underestimating the extent of the nationalized lender's problems and "then come out with a first assessment, a second, a third, fourth."
"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price."
Despite months of painful austerity reforms by the new government, there is growing concern that Spain's new leaders have not done enough and more Spanish banks may need to be saved amid mountains of loans gone bad and foreclosures of property now worth far less than the loans paid out to build it. Some estimates put a complete Spanish sector bailout cost at between €50 billion and €150 billion. But Spain only has €5 billion left in the €19 billion bank bailout fund it established in 2009. This means the country will have to raise the money in bond markets.
Spain is a weak link in Europe not only because of its banks, but also because of poor economic growth prospects that show little sign of improvement. The economy is mired in its second recession in three years and forecast to shrink 1.7 percent for the year. Nearly one of every four Spaniards is unemployed and one-half of all those under 25.