May.29 - Spain is to issue new bonds to fund its ailing banks and indebted regions despite borrowing costs nearing the unsustainable 7 percent level. Ciara Sutton reports.
It needs the biggest bailout in Spanish banking history. And it seems Bankia and its parent group BFA are about to get a bond injection. They asked for 19 billion euros on Friday. The Spanish government has now apparently decided to help by issuing new bonds and raiding its bank restructuring fund. With borrowing costs at an all time high that's an expensive option. But the prospect of cavalry from the ECB has so far not emerged, although it still hasn't been ruled out. Ireland turned to the ECB when it went through a similar process with two of its failed lenders. CMC markets analyst, Brenda Kelly, says it's not a good path to follow. (SOUNDBITE) (English) CMC MARKETS, MARKET ANALYST, BRENDA KELLY SAYING: "I think this is a bit of mistake. I don't believe transferring the bad assets of a bank onto the sovereign is in any way a good idea and we have seen what has happened in Ireland as a result. Granted there is an export led economy from Ireland, granted they seem to be doing okay in terms of exports, but the debt over-hang is something that will be in terms of austerity hanging over Ireland for a long time to come." The grim outlook for the banking sector has again sparked speculation about Spain's ability to fund itself. But Head of Global Research at HSBC Investment Bank, Bronwyn Curtis, says the country can still avoid an international bailout. (SOUNBITE) (English) HEAD OF GLOBAL RESEARCH AT HSBC INVESTMENT BANK, BRONWYN CURTIS, SAYING: "If the euro zone puts enough firewalls in place to protect the banking system, not just in Spain but in other countries as well. I do think it will have to be a pan-European solution for Spain - it won't just be a domestic solution." The ECB has refused to comment on the issue. It's pumped over a trillion euros into Europe's financial system in recent months and could reject such a proposition. Enrique Quemada from One Capital Partners in Madrid says Spain wouldn't be in this position if it had acted sooner to protect its banks. (SOUNDBITE) (Spanish) ENRIQUE QUEMADA, PRESIDENT ONE TO ONE CAPITAL PARTNERS, SAYING: "In 2008 the governments of the United States and Great Britain fixed the financial system by injecting public money into banks. In Spain we have let five years go by before doing it and now finally money is going into financial institutions, banks are being nationalised, so the news is positive but clearly there's the initial shock from the impact of something which should have been done years ago." So the performance of Spanish banks remains at the centre of the euro zone crisis. Since mid-March shares in Santander and BBVA have dropped more than 30 percent. There are also concerns a bailout plan involving the ECB could set a dangerous precedent. Two of Italy's main banks have suffered similar share price falls. As have banks in other euro zone countries. Even the mighty ECB may struggle to help everyone. Ciara Sutton, Reuters.