Spanish capital flight

Spain hemorrhaged capital at the highest rate on record last April, according to figures released by the country's central bank on Thursday, amid fears that the banking sector in the eurozone's fourth largest economy was teetering on the brink of collapse.

Spaniards transferred some 66.2 billion euros ($81.2 billion) abroad in April, compared to 5.4 billion euros during the same period one year ago. According to the Bank of Spain that's the largest capital flight from the country since records began in 1990. The Spanish are largely depositing their money in stronger northern European economies.

Madrid is currently struggling to stabilize its anemic banking sector, which is burdened with toxic home loans that went bad after the real estate bubble burst in 2008. In May, the Spanish government undertook the largest bank rescue in the country's history when it partially nationalized Bankia, the fourth largest bank in the nation.

Bankia is asking Madrid for some 19 billion euros to cover losses from bad real estate investments, more than twice what the government originally estimated. The bank has already received 4.5 billion euros.

Spain in a bind

With slightly more than 4 billion euros left in its bank bailout fund, Spain has little choice but to turn to the capital markets in order to raise money for its failing financial institutions. Economy Minister Luis de Guindos told journalists on Wednesday that Spain's bailout fund would finance the Bankia rescue by issuing bonds.

But the yields on Spanish bonds have reached budget-busting historic highs of near seven percent. Greece, Ireland and Portugal were forced to seek international bailouts when their interest rates hit that level.

"If it is possible to raise the funds through market mechanisms or through actions by the Spanish government, that is better than resorting to a rescue, which has negative connotations," Amadeu Altafaj, spokesman for EU economics commissioner Olli Rehn, told Spanish radio on Thursday.

Rumors of bailout plans

The Wall Street Journal has reported that the International Monetary Fund (IMF) is already drawing up plans for a Spanish bailout. IMF chief Christine Lagarde flatly denied the rumor after holding talks in Washington with Spain's deputy prime minister, Soraya Saenz de Santamaria.

"There is no such plan," Lagarde told a news conference. "We have not received any request to that effect and we are not doing any work in relation to any financial support."

But there has been discussion about Spain possibly tapping into Europe's permanent bailout fund, the European Stability Mechanism (ESM), which becomes active in July 2012. Santamaria discussed the idea with US Treasury Secretary Timothy Geithner on Thursday.

"We were talking about the possibility that the banks, not only Spain's but also in other countries who need it, could access funds directly without intervention from the government and without conditions," Santamaria said. "The treasury secretary indicated that we are working in the same direction and that we must find a solution for the banks."

World Bank President Robert Zoellick, in an article published in Friday's Financial Times, spoke out in support of the idea of tapping into the ESM, arguing that "the guarantees of some national sovereigns are unlikely to be sufficient."

Current eurozone 'unsustainable'

European Central Bank (ECB) chief Mario Draghi, meanwhile, told the European parliament in Brussels on Thursday that his institution had largely exhausted its tools to combat the euro crisis. Draghi reminded parliament that the ECB had already reduced interest rates and given 1.2 trillion euros in loans to banks.

The ECB chief urged the 17 eurozone member states to adopt a broad vision for the future and introduce reforms, saying that the central bank cannot "fill the vacuum of the lack of action by national governments."

Draghi called for the euro system to be fundamentally re-structured, advocating the introduction of a eurozone banking union with a common deposit scheme and central fund for troubled lenders.

"That configuration that we had with us by and large for 10 years, which was basically considered sustainable - I should add in a perhaps myopic way - has been shown now to be unsustainable unless further steps are being undertaken," Draghi said.

The euro hit a 23-month low against the US dollar on Thursday, sliding to $1.2337 before slightly rising to 1.2361 by the end of trading.

slk/ccp (AP, AFP, dpa, Reuters)