By ALAN CLENDENNING and HAROLD HECKLE, Associated Press
MADRID (AP) — Spain faced mounting pressure Wednesday to bolster confidence in its financial system just days after accepting a €100 billion ($125 billion) plan to rescue its banks.
Prime Minister Mariano Rajoy called for greater European fiscal and banking integration to save his country and the 17-country euro currency alliance.
Madrid's key borrowing rate closed at a euro-era high, indicating deep investor concern about the government's financial stability.
And late Wednesday, Moody's Investor Service slashed the government's credit rating by three notches to just above "junk" status. Moody's cited the level of debt Spain will be absorbing, the weakness of its economy and the government's limited ability to raise money.
Moody's said it put Spain on review for another possible downgrade in coming months.
Rajoy went on the offensive in parliament earlier Wednesday. He lambasted the Socialist opposition for not addressing the country's banking debt crisis when it was in power from 2004 until November, and called for their support in "a project for European fiscal and banking integration."
He said Europe now faced a key issue, "which is the subject of liquidity, debt sustainability, and that battle has to be waged in Europe," Rajoy said in the lower chamber. "You and I agree on that, and I am waging it," he said looking straight at leader of the opposition, Alfredo Perez Rubalcaba.
Market pressure on Spain continued to grow, with the 10-year-bond yield — an indication of investor confidence in a state's ability to pay off its debt — ending the day at 6.71 percent, according to FactSet, the highest closing price since the country adopted the euro currency. Madrid's stock index finished the day up 1.4 percent.
Rajoy told Spain's gathered lawmakers that he had sent a letter to Jose Manuel Barroso, president of the EU Commission, and Herman Van Rompuy, president of the European Council, calling for new measures that might help weaker states like Spain. Those could include sharing debt burdens across countries or guaranteeing bank deposits across the eurozone.
He said he would be present at a meeting of European leaders in Rome on June 22 "where I will back fiscal and banking integration."
Rajoy's sentiments were mirrored in the European Parliament in Strasbourg, France, where Barroso said the euro block needed a plan for the long term, including coordinated budgets and banking regulation.
Spain last weekend asked for a loan lifeline from the 17 countries that use the euro to shore up Spanish banks. Because Spain's borrowing rates in financial markets are high, the country can't afford to raise the rescue money itself.
There are fears, however, that because the government will be responsible for repaying the banks' rescue loans, the deal will add to public debt, hurting confidence in the country's ability to finance itself and forcing it into the kind of bailout asked for by Greece, Ireland and Portugal. Spain's borrowing rates have gone up steadily since the weekend bailout announcement.
Analysts say the country is finding fewer and fewer international buyers for its bonds, leaving Spanish banks to buy an increasingly large amount of the government's debt. As the banks continue to struggle with losses on real estate investments, the government is finding it harder to sell its bonds.
Spain does not have a particularly high debt to GDP ratio; at 68.5 percent, it's far lower than even Germany's, which is 81.2 percent. But Spain's economy is in a deep recession and has poor growth prospects, making it very difficult for it to reduce debt.
Any trend upward is worrisome because the country also has a high deficit; at 8.9 percent of GDP, it's among the highest in the eurozone.
Rajoy didn't offer details about how the bank bailout plan will work except to say that banks will pay back the money they receive, but Spain's El Mundo newspaper reported that the loans to the government will last 15 years at 3 percent with repayments to begin no later than 2017. El Mundo cited unnamed sources familiar with the negotiations, and Spain's Economy Ministry declined comment on the report.
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