Europe Fears Bailout of Spain Would Strain Its Resources

Spain is the euro zone’s fourth-largest economy, after Germany, France and Italy, and the cost of a rescue would strain the resources of Europe’s new 700 billion euros ($867 billion) bailout fund that is to become available this summer. That would leave little margin for any additional bailouts.

Spanish and European officials hope a bailout will not be needed. But each day, financial turmoil mounts over the government takeover of the giant Spanish mortgage lender Bankia, the flight of money to safer borders and a worsening recession.

Compounding Spain’s problems has been an outflow of foreign capital from the country, meaning the Spanish banks in recent months have been the only major buyers of its government bonds needed to finance the nation’s budget deficits. With those bonds now plummeting in value, the fate of Spain’s banks and government are intertwined in a financial tailspin.

Because Spain is the euro zone’s fourth-largest economy, after Germany, France and Italy, its problems pose a far greater challenge to European policy makers than does Greece, which is much smaller. Hoping to ease the pressure, the European Commission on Wednesday urged Spain to take market-calming measures, and Lael Brainard, an under secretary at the United States Treasury Department, arrived in Madrid for talks with government officials as part of a regional tour. Worries about Spain helped send stock markets down broadly in Europe, with Wall Street retreating in afternoon trading.

In the bond market, the Spanish government’s borrowing costs are approaching the symbolically dangerous level of 7 percent on 10-year bonds. The rise has stoked worries that Spain might need bailouts similar in scope — though many times larger — than those extended to Greece, Portugal and Ireland. Interest rates in that range had pushed them out of the debt markets that governments rely on to finance their operations.

“At 7 percent, it will be very hard for Spain to obtain funding,” said Santiago Valverde, an economics professor at the University of Granada and a research consultant for the Federal Reserve Bank in Chicago. “It’s not just the government either, but big banks and companies, as well. The markets will close.”

On Wednesday, Spain’s economy minister, Luis de Guindos, acknowledged as much when he said interest rates were “not sustainable in the long term.”

The yield on Spain’s 10-year bond rose 0.21 percentage point Wednesday, to 6.61 percent. In Italy — a country whose debt burden of 120 percent of gross domestic product is much higher than Spain’s — the yield on 10-year bonds rose about 6 percent, hitting a 10-month high.

Since the nationalization of Bankia on May 9 signaled the perilous state of Spain’s banking industry, and drew attention to the limited ability of the government to shore up the banks and prevent the flight of capital from the country, the prime minister, Mariano Rajoy, has insisted that Spain will not need a Greek-style bailout.

No head of state would welcome such intervention, because as Athens and Dublin and Lisbon have found, those rescues come with demands for deeper budget cuts and fiscal rigor.

But Mr. Rajoy’s administration has been floating the idea of engineering a bailout by other means. These include getting Europe’s rescue fund to provide money directly to the country’s banks or to buy Spanish government bonds on the open market, without Europe’s demanding new levels of scrutiny and tough payback conditions.

Economists estimate that if Spain were forced out of the bond markets by its high borrowing costs and had to rely on funds from Europe and the International Monetary Fund to survive, the cost could reach 500 billion euros over several years.

Europe’s new bailout fund, the European Stability Mechanism, will have about 700 billion euros when it goes into operation this summer. But it remains untested in its ability to work quickly.