Speculation Grows Over Spanish Bank Rescue

It's been a roller coaster week for Spain, amid speculation that it can't afford to rescue its troubled banks and might need European aid. Spain held a successful bond auction Thursday, but shortly afterward, the Fitch ratings agency downgraded the country's credit rating.

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DAVID GREENE, HOST:

NPR's business news starts with Spain's banking crisis.

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GREENE: What a roller coaster week it has been for Spain. There are fears that Spain lacks the money to rescue its own troubled banks and may need Europe's help.

Madrid did hold a successful bond auction Thursday and markets responded, but only until the Fitch ratings agency downgraded Spain's debt rating several hours later.

Plans are afoot for European banking union, and that could be a long-term solution to Spain's banking crisis. But as Lauren Frayer reports, Madrid might need some kind of aid a lot sooner than that.

LAUREN FRAYER, BYLINE: At a bond auction Thursday, investors were hungry for Spanish debt. Demand was more than triple the supply. It shows investors still want to hold Spanish bonds long-term.

Economist Gonzalo Garland, at Madrid's IE Business School, says the European Commission has proposed a banking union, after watching Spain struggle to prop up its own banks.

GONZALO GARLAND: A system where there will be direct supporting of banks that are failing in Europe, which will not apply for Spain now, but will be applied in the future. So in a way it will avoid, or at least try to control, such situations in the future.

FRAYER: This banking union, if approved by member states, would prevent situations like Spain's. It probably won't be in place until 2015 - too late for Spain, which the IMF estimates needs some $50 billion dollars for its banks - quick.

So Spain is angling for a short-term fix: an infusion of cash from either one of Europe's rescue funds, or the European Central Bank. That's the fastest way, says economist Rolf Campos, at Spain's IESE Business School.

ROLF CAMPOS: Normally things that are done by central banks move much faster than anything that has to go through congress or parliament. So in this case, the best thing that can happen to Spain is that we get a solution that comes out of the European Central Bank.

FRAYER: Even if the money does come from the ECB, which would be quicker, other countries, like Germany, would have to approve it. But there are signs Berlin may be warming to the idea. After all, six of its own banks were downgraded this week.

For NPR News, I'm Lauren Frayer in Madrid.

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