Spain seems condemned to pay for its own banking rescue after Germany flatly refused to let the eurozone’s future bank supervisor do so, analysts say. That is bad news for Spain’s soaring public debt. But it is only one of a series of concerns now emerging from a eurozone bailout of Spain’s banks, which have been bogged down with bad loans since a 2008 property crash, diplomatic sources and analysts say.

Madrid had battled for a eurozone banking supervisor to be allowed to pump capital directly into its weak banks as part of a planned banking union for the 17-member single currency bloc.

That would have relieved Spain of the need to pay back an estimated 40 billion euros ($52 billion) it plans to use from a 100-billion-euro eurozone credit line.

But German Chancellor Angela Merkel, who faces general elections next year, left no room for doubt about her position on direct recapitalisation for banks that have already been bailed out.

“There will not be a retroactive direct recapitalisation,” she said on Friday after a European Union summit, which agreed to work on setting up a eurozone banking union with supervisory powers during 2013.

A French government source said the question of direct aid for Spain’s banks was not settled. But after the EU summit, a European diplomat was clear: “Spanish banks won’t be recapitalised before the end of 2013, probably in 2014.”

That would leave Spain holding the bill for the rescue loan, which was agreed with the eurozone in June and signed in July.

“Spain is going to ask for about 40 billion euros from the liquidity line,” said Daniel Pingarron, analyst at Spanish brokerage IG Markets. “That means the Spanish public debt grows automatically.”

In fact, Spain’s 2013 budget already takes into account a payment of 30 billion euros for the banking fix, pushing the level of public debt to 90.5 per cent of gross domestic product from an expected 85.3 per cent this year.
But the banking rescue is also running into other serious problems, analysts say.

News: The Daily Independent/Bangladesh/22th-Oct-12