Spanish banks teeter on brink of collapseGo To Original
• Union activists demonstrate against planned public-service cuts in Bilbao. Picture: Getty Images
In a development that has echoes of the economic panic which swept the world in the wake of the collapse of Lehman Brothers, Spain's finance minister and a senior banker admitted that the country's banks were being hit by a freeze on the international lending market, with cash flow at a stand-still.
Business leaders and politicians warned that the crisis in confidence could have repercussions across Europe.
German chancellor Angela Merkel raised the prospect of Spain becoming the second country after Greece to get a euro bail-out. Banking sources said the liquidity freeze was affecting savings banks and small banks, but not the country's biggest financial institutions.
Among those are Santander – which owns Abbey National, including Bradford & Bingley – and BBVA, which was in talks this month to buy the Yorkshire and Clydesdale banks. Other big players in the Spanish banking sector include Banco Popular Español, La Caixa and Bankinter.
In a further blow to European financial confidence, the credit ratings agency Moody's downgraded Greek sovereign debt by four notches to "junk" status.
The Bank of Italy has said that its country's public debt reached a record 1.8 trillion (£1.5trn) in April, as the economic crisis continues to grip Europe.
Dougie Adams, the senior economic adviser to the Ernst & Young Scottish Item Club of economists, said that if the crisis turned into a full-scale breakdown of the euro, the money markets would be entering "totally new territory".
Mr Adams also warned that the crisis in Spain and Greece could lead to UK banks becoming "more cautious" about lending, as well as harming exports.
He said: "It all depends what exposure UK banks have to these European economies. It could eat into the capital position of UK banks and make them more cautious about lending.
"But that's just a potential problem, as I suspect UK banks don't have that much access to banks in southern Europe.
"It could weaken exports, as Greece and Spain may be important to some companies exporting from here."
He added: "At this stage I don't see a need for mad panic. Clearly we have issues with a large government deficit. But we've taken the escape route of devaluation of the pound, which means as public-sector demand falls we have a good opportunity of seeing export demand grow. But clearly, if Europe or bits of it is in trouble, this doesn't help us, as it makes it more difficult for our exports."
Spain's government denied it was on the brink of needing Greek-style financial rescue package.
The Greek parliament recently forced through a programme of austerity measures, leading to mass street protests against cuts imposed on frontline services, along with severe wage restraint.
Spain is implementing several major economic programmes at the same time to save itself from an economic crisis, including a £15bn euro austerity plan, a shake-up of the labour market and a consolidation of its banking sector.
The fourth-largest economy in the Eurozone, the country needs to refinance 16.2bn of bonds in July.
Spain's treasury secretary, Carlos Ocana, admitted that there was a liquidity freeze on some of the country's banks and said the government was working to restore confidence through budget cuts and economic reforms.
"It's definitely a problem," he told business leaders in the northern town of Santander. But he denied that Madrid was negotiating any financial aid package.
Mr Ocana said: "Spain does not need additional financing from any international institution. The rumour is false, and I deny it."
Francisco González, the chairman of Spain's second-largest bank, BBVA, agreed the problems were harming the borrowing abilities of the country's companies and financial firms. "If the Spanish state has difficulty in financing itself outside Spain, then the difficulties will be even greater for those in the private sector," he said.
"For the majority of companies and Spanish financial firms, international capital markets are closed."
Spain should bring public spending under control and ensure there was transparency, he said, while imposing structural reforms in pensions, labour, health and education.
Mr González added: "Spain has three urgent tasks, one of which is to ensure its public finances are sustainable in the medium-long term by guaranteeing transparency and controlling public spending and debt."
He also said the financial system needed to be restructured.
Meanwhile, the Spanish government said it had given up on three-way talks with unions and business leaders to get a consensus on labour reform and was now negotiating with political parties to ensure the plans won the backing of parliament. The minority Socialist administration says reforms are needed to strengthen the economy.
Spain's biggest trade union said it would be calling a general strike to protest against the government's plans and would announce a date for the strike at a news conference today.