Panic in Spain as money flies out of country and head of European bank says Eurozone is 'unsustainable'
By Hugo Duncan
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Senior European officials last night issued a grave warning that the very survival of the euro is at risk as the crisis in Spain threatens to tear the region apart.
Politicians and central bankers said the situation in the eurozone was unsustainable and drastic action was needed to prevent the 'disintegration' of the single currency.
They spoke out as European leaders scrambled to stop the financial crisis in Spain spiralling out of control and infecting other countries such as Italy.
One analyst warned of 'a perfect storm' in Spain as the country's deputy prime minister held crunch talks in Washington with US Treasury Secretary Tim Geithner and the head of the International Monetary Fund, Christine Lagarde.
It is thought the IMF is drawing up contingency plans for Spain to prevent a cataclysmic financial meltdown.
The euro crashed to a 23-month low against the US dollar at $1.2335 but was up slightly against sterling having recovered from its lowest level since late 2008. Last night, £1 was worth 1.2460 euros.
Mario Draghi, president of the European Central Bank, said the eurozone was unsustainable in its current form. In his sharpest criticism yet of eurozone leaders' handling of the crisis, he said the ECB could not 'fill the vacuum' left by governments in terms of economic growth or structural reforms.
And he called for overwhelming force to be used to shore up Europe's battered banks to restore confidence in the financial system.
Ignazio Visco, governor of the Bank of Italy and a senior ECB member, said political inertia and bad economic decisions have put 'the entire European edifice' at risk. 'There are growing doubts among international investors about governments' ability to ensure the survival of the single currency,' he said.
Olli Rehn, EU economic and monetary affairs commissioner, said bold action was required 'if we want to avoid a disintegration of the eurozone'.
The apocalyptic tone from usually measured EU officials betrayed the spreading sense of panic.
Irish voters are likely to approve a European treaty on budget discipline in yesterday's referendum – securing continued aid. The result will be announced later today.
But the outcome of a second Greek election on June 17 – seen as crucial for the country's future in the eurozone – is too close to call.
And fears are mounting that Spain, the fourth biggest economy in the eurozone, will be the fourth country to need a bailout.
City commentator David Buik, of financial betting firm BGC Partners, said: 'There is an uncomfortable feeling out there. Whilst EU politicians and bureaucrats continue to waffle and the army of intellectual egg-heads proffer their useless economic advice, sentiment will continue to be negative.'
Investment bank JP Morgan warned that Spain would need £280billion to keep it afloat, with UK taxpayers potentially forced to stump up billions through the IMF.
The Spanish banking system has been crippled by nearly £150billion of toxic loans to homeowners and developers. One in four Spaniards are now out of work.
Bankia, one of the country's biggest lenders, has asked the government for a £15billion lifeline, triggering concerns about the scale of the losses at other Spanish banks.
With Spain's regions also in trouble, international investors are betting that the Spanish government will not be able to foot the bill for it all. Edward Thomas of investment firm Quantum Global Wealth Management declared: 'It's a perfect storm for Spain.'
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