Spain will take a decision on bank recapitalisation within the next two weeks, Finance Minister Luis De Guindos said today.
In Brussels for talks, Mr De Guindos told journalists that Madrid "will take decisions on recapitalisation within approximately 15 days."
Worries were mounting over Spain's finances, with Madrid needing help to find €80 billion for bank recapitalisations in the midst of a deep recession brought on by the bursting of a property bubble.
"The Spanish bank problem is limited to certain entities which have already been treated and brought under check" by the government, the finance minister said.
Markets increasingly expect Spain to need an international lifeline because it cannot raise the huge sums required to rescue its bad loan-ridden financial sector.
Spain faces soaring borrowing rates on bond markets, which are wary of the cost of bailing out banks and pessimistic about the state's struggle to rein in public deficits at a time of recession and high unemployment.
Governments can only apply for ESM - Germany
Sources in Berlin said the German Finance Ministry believes the euro zone's permanent rescue fund, the €500 billion European Stability Mechanism, due to enter into force next month, could lend directly to Spain's bank rescue fund. But EU lawyers are not convinced this would be legal.
One advantage would be that smaller euro zone countries such as the Netherlands or Finland could not hold up a loan since approval by the ESM board does not require unanimity.
However, Germany reiterated today that only governments can apply for cash from the European bailout funds to recapitalise banks and that lenders cannot directly seek aid.
"These instruments must be applied for by governments... whether a government wishes to apply is purely a matter for the government," Steffen Seibert, the spokesman for Chancellor Angela Merkel, told a regular briefing.
He also said that the German government opposes a cross-border European banking deposit guarantee before "important steps towards integration" have been taken.
"We mustn't take the second step before the first," Mr Seibert added.
A series of reforms to Spain's financial system have failed to persuade investors that huge losses from a 2008 property market crash have been fully addressed, and doubts about the cost of a final rescue have deepened the euro zone debt crisis.
Finance chiefs of the Group of Seven major economies, afraid of a possible run on Spanish banks, held urgent but inconclusive talks on the European situation yesterday.
Underlining the dangers to the entire 17-nation zone of inaction, Moody's Investors Service cut the credit ratings of several German and Austrian banks, citing the greater risk of further shocks stemming from the region's debt crisis. Germany is the single currency's strongest economy.
Spain is the latest member of the euro area under pressure to accept international aid following financial rescues of Greece, Ireland and Portugal in the two-year debt crisis.
The premium investors demand to hold its 10-year debt over the German equivalent hit a euro era high last week on concerns it will eventually have to accept a Greek-style bailout.
EU leaders meet on June 28-29 to discuss a strategy for overcoming the crisis, which began in late 2009 when Greece revealed it had covered up a huge budget deficit.
Spain to test the market tomorrow
Spain will test the market tomorrow by issuing up to €2 billion in government bonds at auction.
The ECB has so far shunned calls to resume purchases of Spanish government bonds, and Germany has rejected allowing direct aid from the euro zone's rescue fund to recapitalise Spanish banks without setting conditions for the government.
Pressure is building on Germany, the biggest contributor to euro zone rescue funds, to work harder on fostering growth.
Berlin argues it is already doing its share by encouraging generous domestic wage settlements, accepting the prospect of higher-than-usual German inflation and most recently agreeing that Spain should have more time to achieve its fiscal targets.
Chancellor Angela Merkel opened the door on Monday to the prospect of a euro zone banking union in the medium term, saying she would consider the idea of putting systemically important cross-border banks under European supervision.
However, Berlin is so far resisting a joint deposit guarantee for euro zone banks and a bank resolution fund, both of which would create new liabilities for German taxpayers.
French Finance Minister to meet Spanish counterpart
The euro zone is ready to "mobilise very rapidly" to come to Spain's financial assistance "if the Spanish government wishes," French Finance Minister Pierre Moscovici said today.
"We also respect the sovereignty of a great country like Spain in relation to what request it expresses," he said at a press conference, implying that Madrid had not yet made such a request.
The use of the euro zone's future ESM rescue fund to directly recapitalise struggling Spanish banks would require imposing conditionality in terms of banking supervision, Mr Moscovici added.
Mr Moscovici, who is due to meet with his Spanish counterpart later today, said that the euro zone's existing EFSF bailout fund could be used if aid were urgently required in the short term.
"If the Spanish government wishes, we have instruments of solidarity which can be mobilised very quickly," he told a news conference.
"France favours the ESM being used to directly recapitalise banks with the appropriate supervisory conditions," he added.
