Spain's borrowing costs rise closer to levels considered unsustainable

A bailout of up to €100bn for Spain's ailing banks failed to calm nerves about the future of the euro on Monday amid confusion over the plan's details and worries that Greek voters might choose to abandon the single currency. The hurried bailout announcement after an emergency video conference of eurozone finance ministers at the weekend was meant to ease pressure on Spain and other troubled European economies ahead of Sunday's elections in Greece. But Spain's borrowing costs rose on Monday, nudging closer to levels that are considered unsustainable and dragging Italy towards the danger zone. Europe's stock markets fell slightly, despite an early bounce, the FTSE 100 in London finishing down 0.05%. Investors worried about uncertainty over the amount of bailout money Spain would take, the mechanism for providing it and the conditions attached to the deal. "The size of the deal is meant to show a real commitment on the part of the eurozone to stabilise the system," said Robert Pavlik, of Banyan Partners. "However, this just moves the problem down the road and shows how nervous the EU was going into the Greek election." Spanish prime minister Mariano Rajoy's triumphant approach to the bailout appeared to annoy Germany and other eurozone countries who must persuade sceptical voters that the money is well spent. As he tries to escape the devastating political price paid by other European leaders who have asked for bailouts, Rajoy has told Spaniards that the €100bn comes with no strings attached except for the banks receiving the money. He refuses to call it a bailout. But Germany's finance minister, Wolfgang Schäuble, warned that – as with Greece, Portugal and Ireland – Spain must answer to the feared "troika" that enforces the debt repayment terms imposed on other bailed out countries like Portugal, Greece and Ireland. The troika is made up of the European commission, the International Monetary Fund (IMF) and European Central Bank. "The Spanish state is taking the loans, Spain will be responsible for them," Schäuble said. "There will likewise be a troika. There will of course be supervision to ensure that the programme is being complied with, but this refers only to the restructuring of the banks." "Of course there will be conditions," EU competition commissioner Joaquín Almunia added in a radio interview. "Whoever gives money never gives it away for free." The eurozone ministers who approved the deal warned they would watch Spain's deficit-busting and reform programme carefully, but did not say whether loans would depend on Rajoy's government hitting targets. Rajoy's achievement in limiting the explicit conditions to Spain's banks has been broadly welcomed in a country that believes the rest of its economy needs no international oversight. But those countries already under troika control warned that they will demand a revision of their bailout terms if Spain receives special treatment. "We will be watching the process of the specific programme for Spain's banking system closely," Portugal's prime minister Pedro Passos Coelho said. "We cannot have first class and second class states," warned Portugal's opposition socialist leader Antonio José Seguro. Ireland's prime minister, Enda Kenny, has already said that if Spain wins soft terms, then these must be offered to others. Those terms will not be clear until Spain formally requests a sum of money. It is not clear whether this would be provided by the European Financial Stability Facility or the new arrangement which replaces it in July, the European Stability Mechanism. Other European leaders admitted that the bailout decision had been taken to avert yet another moment of panic in Europe's long-running debt crisis. "We have managed to avoid a major crisis but the problems are still there," Finland's prime minister Jyrki Katainen told Reuters. Investors worried that the bailout was a temporary solution to Spain's problems as it falls back into recession and suffers 24% unemployment. "Call it what you like, but this is a bailout, the first (and only for banks), but most likely not the last for Spain," said Oliver Burrows of Rabobank Credit Research, who pointed to the amount of government debt held by Spanish banks. "We suspect that inevitably the Spanish government will have to seek its own bailout." The IMF said on Friday that Spain's former savings banks and some of its medium-sized commercial banks would jointly need at least €40bn. The government has said it will wait for two independent auditors to produce valuations of Spain's total bank assets before deciding how much money to ask for. They will make their first reports by 21 June and government sources have already suggested they will be close to the IMF figures. Recently part-nationalised Bankia has asked for €19bn and officials have recognised that two other banks need a further €9bn. But Spain's government has twice underestimated the sums needed to rescue its banks this year, with two rounds of provisioning totalling €80bn, and investors remain wary.