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Spanish exit from euro 'better than begging bowl'

The regional leader of Asturias in Spain has become the country's first major figure to call for a radical change of strategy and exit from the euro, unless monetary union is fundamentally reformed.

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The regional leader of Asturias in Spain has become the country's first major figure to call for a radical change of strategy and exit from the euro, unless monetary union is fundamentally reformed.

Francisco Alvarez Cascos, the region's president and former chief of Spain's ruling party, accused premier Mariano Rajoy of humiliating the nation by touring Europe with a "begging bowl".

The attack came as Spanish finance minister Luis de Guindos hopped from Berlin to Paris in a desperate attempt to drum up support as yields on Spanish 2-year debt surged to a fresh record of 7%.

De Guindos hopes to recruit enough allies to force a policy change by the European Central Bank and avert a full sovereign rescue. He angrily denied press reports that Madrid has thrown in the towel and negotiated German backing for a euros 300bn (pounds 235bn) package from Europe's rescue fund.

 Cascos said the government is "utterly incompetent", but warned that the deeper crisis is a "perverse" monetary system where capital flight from countries in distress is funding creditor states at zero rates. "This can't go on for long, or we will have to think about leaving the euro before we are thrown out," he said.

The downward economic slide in Spain is accelerating, with all-conquering Telefonica forced to cancel its dividend and slash board pay by 30pc. In a worrying twist, top companies in Spain and Italy have seen a surge in borrowing costs over the past two days. Yields on five-year Telefonica debt have risen 60 basis points. Telecom Italia has jumped 40 points, while Fiat bonds have crashed over the past two weeks.

Suki Mann from Societe Generale said markets fear that Moody's may downgrade Spain by two notches, degrading the country's corporate nexus to junk levels. "Its very bleak out there," he said.

Bourses rallied after Austria's central bank governor, Ewald Nowotny, said he was personally open to the idea that the European Stability Mechanism or bail-out fund should be given a banking licence, allowing it to borrow from the ECB. This would vastly boost its euros 500bn firepower.

The MIB index in Milan rose 1.2pc and Madrid's IBEX rose 0.8pc, but traders urged caution. The bank's president Mario Draghi said earlier this month that such a scheme would amount to an ECB sovereign rescue by the back door and "destroy its credibility".

Harvinder Sian from RBS said an ESM bank licence is the only "high-impact turnaround policy left" but warned that Germany will not drop its veto until the euro is on the brink. The Spanish are hoping to prod the eurozone's Latin bloc to use its majority power on the ECB council more aggressively to force a policy change.

Italian premier Mario Monti has already called on the ECB to cap the bond yields of those states that are sticking to austerity, and French leader Francois Hollande has backed a more activist role, but it is unclear whether either are willing to risk a showdown with Germany.

The ECB's bond-buying programme is in the "deep freeze" for now, according to one ECB member. The bank is loath to carry out "quasi-fiscal" rescues in breach of its mandate, deeming it the responsibility of EU governments to bail out states. However, the International Monetary Fund has joined the global chorus calling for bond purchases, and Draghi is quietly laying the ground for a shift. There are "no taboos", he said this week, adding that "the preservation of the euro is part of our mandate".

De Guindos made no breakthrough on the ECB in Paris though he did secure a joint statement from his French counterpart Pierre Moscovici calling on all parties to "fully implement" the terms of the EU summit deal in June.

They said that draft proposals for a European banking supervisor must be in place in September, clearing the way for the direct recapitalisation of Spanish banks by the ESM. The aim is to break the self-reinforcing link between crippled lenders and the state.

The hard reality is that law passed by the German Bundestag stipulates that Spain's euros 100bn bank rescue is a loan to the Spanish government, whatever the EU summit document says. That is what markets care about.

 

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