The UK is praying Spain sorts out its banking crisis

There was an eerie calm about the plight of Spain at the International Monetary Fund’s spring meetings in mid-April. The country’s borrowing costs may have been inching perilously higher on news that Spanish banks had tapped the European Central Bank for around €200bn (£160bn) of a €530bn round of emergency funding, but officials gathered in the warm Washington sunshine were confident that Madrid would soon win back the markets. “Mariano Rajoy could have asked for a bail-out after winning the election,” one central banker at the meeting said about Spain’s new prime minister, who was sworn in only last December. “But the country is well ahead on its funding needs this year and can pay up for debt in the short term, even if it is uneconomic. It is moving forward with structural reforms.” Spain would not be seeking a bail-out. The message was clear. Six weeks later, the country’s banking crisis is threatening to sink the nation. Around €100bn was pulled out of Spanish banks in the first three months of the year, €66bn in March alone, on concerns about the solvency of the institutions. At about 5pc of deposits, the “bank jog” – as some wags have billed it – is in danger of turning into a full-blown “bank run” that would send Rajoy back to Washington – this time cap in hand. “We are in a situation of total emergency, the worst crisis we have ever lived through,” Felipe Gonzalez, Spain’s former prime minister, said last week. The following day, Olli Rehn, Europe’s economics commissioner, warned that the eurozone was on the brink of “disintegration”. Greece, Portugal and Ireland might be small enough to contain, but Spain, the currency region’s fourth largest economy, poses a far more dangerous threat.