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Prime Minister: Spain Can't Sustain High Borrowing Rates
2012-05-24 03:30:42 (227 weeks ago)
Posted By: Intellpuke

Spain can’t continue much longer with its current high borrowing rates, its prime minister warned Wednesday as he urged a joint European response to keep the region’s debt problems from getting worse.

Spanish Prime Minister Mariano Rajoy and newly elected French President Francois Hollande, due to meet other European Union leaders later in the day, also stressed their commitment to keeping Greece in the euro despite its political uncertainty.

“Europe has to come up with an answer,” Rajoy said in Paris alongside Hollande. “It is a must, because we cannot go on like this for a long time, with large differences when it comes to financing ourselves. And it is because of these differences that the policies that we Europeans believe in, such as controlling government spending and reforms to encourage growth, ultimately have no effect.”

Expectations were low, however, that the leaders gathering in Brussels will agree to any concrete measures to boost growth and stability in the 17-country euro zone. Europe’s main stock indexes plunged more than 2 per cent, with Spain’s Ibex down 3.3 per cent. The euro fell 0.5 per cent to $1.2588 (U.S.), its lowest since August 2010.

Spain’s borrowing rates are high – and rising – because of fears that its government finances might be overwhelmed by the costs of rescuing its ailing banking sector. High borrowing rates are at the heart of Europe’s crisis and have already caused Greece, Ireland and Portugal to need bailouts.

Mr. Rajoy suggested the European Central Bank resume some of its emergency measures, such as the purchase of government bonds of financially weak countries, which has the impact of lowering countries’ borrowing rates. The ECB has suspended the purchases because, as an independent body, it does not want to be seen supporting governments directly. Instead, it has given European banks massive amounts of cheap loans to bolster confidence in the financial system.

President Hollande said the ECB’s role would be discussed by European leaders, and said he will formally propose so-called eurobonds – debt issued jointly by euro zone countries – at Wednesday’s summit.

(story continues below)

Such bonds would aim to bring down borrowing rates for financially weak states by distributing the risk of their debt across the whole region. Germany is opposed to such a move because it would raise its own borrowing rates and reduce the pressure on heavily indebted governments to heal their finances. Prime Minister Rajoy said he doesn’t think the 27 E.U. leaders will resolve the eurobond dispute Wednesday.

Hollande insisted he would stick by his push for a Europe-wide growth pact by the end of June. He won election earlier this month in part on his attacks on austerity measures championed by his conservative predecessor Nicolas Sarkozy and Germany’s Angela Merkel. His political plans remain uncertain, however, depending on whether his fellow Socialists take control of parliament in legislative elections next month.

Pressure is rising on European leaders to agree to new growth measures to complement the budget cuts. Both the International Monetary Fund and the Organization for Economic Cooperation and Development have said the pace of austerity measures should be slowed in some countries to lower the risk of a severe recession.

The OECD, which monitors economic trends in developed economies, openly called for the use of eurobonds and more emergency measures from the European Central Bank to keep the slowdown from dragging down the global economy.

Alongside economic growth, Greece’s electoral turmoil and dismal finances will be high on leaders’ minds in Brussels. President Hollande said he would “do everything to convince the Greeks to stay in the euro.”

Prime Minister Rajoy agreed there was no doubt the country should remain in the currency union: “What I want is that Greece stays in the euro zone, that’s what’s best for Greece and best for Europe.”

Borrowing costs are up for the most indebted governments. There is an increasing number of reports of worried savers and investors pulling funds out of banks that are seen as weak. Meanwhile, unemployment is soaring as recession grips nearly half the euro zone countries.

Intellpuke: You can read this article by Associated Press writer Thomas Adamson, reporting from Paris, France, in context here:

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