MADRID: Spain, battling a debt crisis that is shaking its government, banks and companies, will soon issue new bonds to fund ailing lenders and indebted regions despite borrowing costs nearing the seven per cent level that drove other states to seek a bailout.
The move will dent the country's strong liquidity position and further worsen public finances under scrutiny from investors and European officials who fear the euro zone's fourth economy may go the same way as Greece, Portugal and Ireland.
Spain's banks and regions, reeling from a burst property bubble, are at the heart of its economic problems and economists say there is little hope of emerging from recession until they have been reinforced.
A government source said yesterday that Spain would likely recapitalise Bankia, which asked for 19 billion euros ($23.7bn) on Friday, by issuing new debt and possibly drawing cash from the bank restructuring fund and Treasury reserves.
"There is a clear preference to tap the market. The other option (injecting state bonds directly into Bankia) is marginal," the government source said.
"The (bank restructuring fund) FROB has liquidity and can tap the market. The Treasury also has a strong liquidity position. We'll choose one or the other mechanism."
Spain's woes, combined with growing uncertainty about whether Greece will remain in the euro zone, has reignited the currency bloc's debt crisis on nervous financial markets, raising calls for more radical EU action.
European Commission president Jose Manuel Barroso yesterday called for European leaders to agree on a path to full economic union to reassure investors about the future of the euro area.
However, a major survey released yesterday showed support for European integration has fallen sharply across the 27-nation European Union since the debt crisis began.