May 30 - The European Commission throws Spain two potential lifelines, offering more time to reduce its budget deficit and direct aid from a euro zone rescue fund to recapitalise distressed banks as the Madrid stock market hits a nine-year low. Ciara Sutton reports.
From bad to worse - deepening worries over Spain's banks sent the Madrid stock market to a nine-year low. The government is hoping to tap credit markets to inject funds into its ailing lender Bankia. But with 10 year borrowing costs close to levels at which Ireland and Greece sought international bail-outs that option now looks expensive. Spanish Prime Minister Mariano Rajoy. (SOUNDBITE) (Spanish) PRIME MINISTER MARIANO RAJOY SAYING: "A debate must be opened on the Europe of the future, I am in favour of more fiscal integration, more monetary integration and more political integration and there the future role of the European Central Bank and the Eurobonds should be discussed." He insists Spain has no intention of seeking an EU/IMF bailout. But Head of Market Economics at NAB Group, Tom Vosa, says the country may not have a choice. (SOUNDBITE) (English) HEAD OF MARKET ECONOMICS AT NAB GROUP, TOM VOSA, SAYING: "The crunch time for Spain will be if we see those short-term yields go above seven percent. If that starts to happen then I think we are in bailout territory. Every other country that has seen yields go over seven percent has had to ask for official assistance." Worries for Spain also pushed Italy's funding costs sharply higher at a bond sale - 10-year yields topping 6 percent for the first time this year. And the Euro neared a 2 year low. The European Commission did offer Spain two potential lifelines - more time to reduce its budget deficit and direct aid from the euro zone rescue fund to recapitalise its distressed banks. EU Commissioner Olli Rehn: (SOUNDBITE) (English) EUROPEAN COMMISSIONER FOR ECONOMIC AND MONETARY AFFAIRS, OLLI REHN, SAYING: "Spain and Cyprus are facing very serious imbalances not least in their financial sectors which needs to be addressed as a matter of urgency." But while the Commission can propose new laws member states decide whether they become law. A Treaty change would be required to allow direct loans to banks. And that takes time to organise - something Spain may not have. Ciara Sutton, Reuters.