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Spanish Prime Minister Mariano Rajoy attends a meeting at the senate in Madrid on Tuesday. The euro fell as a Spanish minister said high borrowing costs meant credit markets were closing to Spain, though losses were limited before an emergency conference call of Group of Seven finance chiefs.


For the first time, Spain is admitting it needs European help to shore up its struggling banks.

Spanish budget minister Cristobal Montoro on Tuesday said the banks need funding, though not an "excessive" amount.

"That's why it's so important that the European institutions open up and help us achieve, help facilitate, that figure because we're not talking about an astronomical figures," he said in an interview on Onda Cero radio.

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Emilio Botin, chairman of Santander, Spain's biggest and most successful bank, has said the Spanish banks need about €40-billion of new capital. Mr. Montoro did not reject or accept this figure. Some analysts put the figure much higher. UBS said the Spanish banks may need as much as €120-billion to bolster their capital.

Spain's admission helped to break a three-day winning streak for the euro, which was down 0.44 per cent against the euro, to $1.244 (U.S.), in mid-afternoon trading, Central European Time. In London, th e FTSE-100 index lost more than 1 per cent. Brent crude dropped slightly and gold rose.

Investors had already been in a downbeat mood because of data, released by Markit, that showed that Germany's service sector grew at its slowest pace for six months in May, while sinking in most other countries. The data helps to confirm that the 17-country euro zone is slipping back into recession. Slowdowns in Italy, Spain and France are dragging down the region.

Spain's admission that its banks need a lifeline came as finance minister of the Group of 7 countries held a conference call to discuss the resurgent euro zone crisis, which is littered with undercapitalized banks. Details about the outcome of the call were not immediately available, though Japanese finance minister Jun Azumi reportedly said that the possibility of Greece leaving the euro zone was not discussed.

Spain's plea for funds for its banks was also scant in detail and may have been part of an effort to gain acceptance for a "banking union." Endorsed by France, Italy and Spain, but not Germany, the union's theoretical components would be euro zone-wide deposit insurance, a recapitalization fund and a supra-national banking regulator.

In a note, RBC foreign exchange research team said "The comments from Montero appear to be an attempt to pile on the pressure on the rest of Europe to do more – he asks for leaders to agree on a banking union by the end-June summit (though the chances of that are very small indeed").

Spain has not made a formal request for financial assistance for its banks. A test of the country's ability to fund itself – and therefore its banks – will come on Thursday, when it is to auction as much as €2-billion of bonds. As Spain's banking crisis deepens, Spanish bond yields have climbed to about 6.5 per cent, not far short of the 7 per cent that triggered the bailouts of Greece, Ireland and Portugal.

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Bankia is Spain's biggest banking problem. The fusion of seven weak savings banks, it is need of €19-billion in fresh capital.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More


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