Spain Warns of Increasing Debt Costs

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Rajoy told parliament Wednesday that European leaders need to adopt strong banking¹ and fiscal² ties when they hold a two-day summit, starting Thursday in Brussels. The Spanish leader said he will call for leaders in the 17-nation currency bloc³ to send a $125 billion rescue package directly to Spanish banks, rather than through the Madrid government as is now required, so the government would not ultimately be responsible for paying back the loans.

He said Spain "is going through a very difficult economic situation." Spain's central bank said the country's economy is contracting faster in recent months than in the first quarter of this year, when it fell three-tenths of a percent.

Rajoy said Spain, Italy and other debt-ridden countries need currency bloc leaders to send a clear signal to international financial markets "that the euro is here to stay." Spain's borrowing costs have risen in recent days to near the 7 percent interest rate on government debt at which the Greek, Italian and Portuguese⁴ governments all were forced to secure international bailouts.

Numerous European leaders are pushing Germany, the eurozone's most potent⁵ economic force, to do more to ease the financial plight⁶ of the currency bloc's weaker governments. But German Chancellor⁷ Angela Merkel told her parliament that Germany can only do so much, and that austerity spending measures remain the key to improving government finances.

"I expect controversial discussions in Brussels and once more, all eyes -- or at least a lot of eyes -- will be focused on Germany," she said. "But I reiterate⁸ here and today what I have last said in this parliament on June 14: Germany is a growth engine and a stabilizing⁹ anchor in Europe. But even Germany's strength is not unlimited¹⁰. We must not over-strain Germany's strength."

Some eurozone leaders are calling for the sale of eurobonds, supported by the entire currency bloc, but Merkel remained adamant¹¹ in her opposition¹² because they likely would increase Germany's borrowing costs.

"Apart from the fact that eurobonds and euro bills and so on are unconstitutional in Germany, I believe they are economically wrong and counterproductive," she said.

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