MADRID, Spain — Spain cannot finance itself for long at the high rates it now pays on the markets, Prime Minister Mariano Rajoy warned Wednesday on the eve of a European Union summit.
If Spain, the eurozone's fourth biggest economy, is shut out of the markets it could lead to a full-blown bailout for the country with unfathomable consequences for the 17-nation eurozone.
"The most urgent subject is the subject of financing," Rajoy told parliament.
"We cannot finance ourselves for a long time at prices like those we are now paying," he said as the yield on Spanish government 10-year bonds traded at more than 6.8 percent.
Rajoy's message served as a blunt warning to his EU partners to take actions to reassure markets and bring down the punitive rates that Spain, Italy and other fragile eurozone economies must pay to finance themselves.
"There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries," he said.
Investors are deeply concerned over Spain's banking sector, which has been thrown a 100-billion-euro ($125 billion) rescue loan by the eurozone to fix balance sheets heavily exposed to the collapsed real estate sector.
But markets also are sceptical of Spain's targets of slashing the public deficit during a recession with unemployment at 24.4 percent -- the highest in the industrialised world.
That recession is deepening, the Bank of Spain warned.
After economic output shrank by 0.3 percent in the last quarter of 2011 and again in the first quarter of 2012, latest data showed further contraction in the second quarter "at a more intense pace", it said.
Investors fear Spain, whose public debt would actually increase because of the banking loan, could be forced to seek a state bailout, going the same way as Ireland, Greece and Portugal before it.
But Spain's economy is twice the size of those three eurozone victims combined, and if it falls many analysts fear the eurozone itself would be in peril.
Even the IMF has said it doubts Spain can meet its goal of slashing the deficit to from 8.9 percent of economic output last year to 5.3 percent this year and 3.0 percent in 2013.
Rajoy said he would press his European partners to agree to "greater European integration," including for fiscal and banking union among the eurozone partners.
But calls by Spain, Italy, France and other European nations for a pooling of eurozone debt in the shape of eurozone bonds to quickly relieve market pressure has met stiff opposition from Germany Chancellor Angela Merkel.
In the run-up to the summit's opening on Thursday, she even appeared to harden her line, dismissing eurobonds as "economically wrong and counterproductive".
Berlin is unwilling to consider what Merkel termed "easy" solutions to the debt crisis -- such as eurobonds -- that it believes do not strike at the heart of the problem: lax fiscal discipline and insufficiently centralised EU control.
Merkel has reiterated that the answer to the crisis is "more Europe, not less Europe" and wants to see member states ceding more sovereignty to Brussels. "Guarantees and controls must go together," she has insisted.
With Cyprus the fifth member of the 17-nation eurozone to seek a bailout, Europe's politicians have engaged in a flurry of shuttle diplomacy to thrash out a solution, culminating in Merkel's with French President Francois Hollande later Wednesday.
The summit is likely to agree on a "growth pact" with measures worth around 130 billion euros as well as a plan towards closer union that will hand the EU the final say over national budgets in the eurozone as well as a banking union.
Rajoy's warning could also be directed at the European Central Bank, which has intervened on bond markets before when Spanish and Italian rates reached such unsustainable levels, but has stood on the sidelines for months.
The ECB has said it is up to EU governments to fix the root problems of fiscal controls.
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