Spain’s leader warns nation may not be able to borrow much longer

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MADRID -- Paying ever-higher rates to borrow money, Spain may not be able to finance itself much longer through debt, the country’s prime minister warned Wednesday. It was the clearest indication yet that his country may need an even bigger rescue than a European bailout already slated for its banks.

Although fellow government ministers have hinted at such, Prime Minister Mariano Rajoy’s comments before parliament marked his first and most direct admission that Spain is close to being locked out of capital markets. The interest rate Madrid pays to borrow using short-term bonds nearly tripled at an auction a day earlier.

‘We can’t keep funding ourselves for too long at the prices we’re currently paying,’ Rajoy told lawmakers on the eve of a crucial European Union summit that begins Thursday in Brussels. Spanish lawmakers also debated whether to raise property, sales and energy taxes to close the budget gap.

Rajoy’s comments suggest that Spain’s financial woes go well beyond its troubled banks, which are burdened by unpaid property loans left over from its housing bubble. The country’s borrowing costs have soared in the last several weeks after Spain requested a loan from fellow European nations to aid its banks, as investors have come to realize the negative effect that helping hand would have on Madrid’s books.

Spain’s budget deficit was 8.9% of the country’s gross domestic product last year, nearly three times what EU rules allow. Rajoy has pledged to cut the deficit down to the required limit of 3% of GDP by the end of next year, but the International Monetary Fund has said that looks unlikely.

Rajoy told parliament he would push fellow leaders in Brussels to allow aid to go directly to troubled Spanish banks to ensure the European loan would not exacerbate the government’s debt load.

But finance ministers of the Eurozone, made up of the 17 nations that share the euro currency, rebuffed that suggestion Wednesday, issuing a statement saying ‘the Spanish government will remain fully liable’ for the loan. Germany in particular has insisted that Rajoy’s administration be held accountable for loan repayment.

Rajoy has also suggested that the European Central Bank could implement emergency lending mechanisms to alleviate market pressure and allow fragile economies such those of Spain and Italy to refinance their debt.

Wednesday’s parliamentary debate over tax hikes marked the reversal of a campaign promise by Rajoy’s ruling conservatives, who swept Socialists from power in November. Lawmakers are also weighing whether to scrap a tax rebate for new home buyers, introduced just six months ago.

The International Monetary Fund has said Spain should raise taxes and cut public employees’ salaries to narrow its budget deficit. But until now, Rajoy has said he has no intention of following the IMF’s nonbinding recommendations.

Meanwhile, the Bank of Spain said Wednesday that the country’s economic slump ‘intensified’ in the second quarter. Consumer confidence, car sales and retail sales continue to fall, it said.

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-- Lauren Frayer