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Spain can't afford high rates for long: PM

world Updated: Jun 27, 2012 14:13 IST

Spain cannot finance itself for long at the high rates it now pays on the markets, Prime Minister Mariano Rajoy warned Wednesday on the eve of a European Union summit.

If Spain, the eurozone's fourth biggest economy, is shut out of the markets it could lead to a full-blown bailout for the country with unfathomable consequences for the 17-nation eurozone.

"The most urgent subject is the subject of financing," Rajoy told parliament.

"We cannot finance ourselves for a long time at prices like those we are now paying," he said as the yield on Spanish government 10-year bonds traded at more than 6.8%.

Rajoy's message served as a blunt warning to his EU partners to actions to reassure markets and bring down the punitive rates that Spain, Italy and other fragile eurozone economies must pay to finance themselves.

"There are institutions and also financial entities that cannot access the markets. It is happening in Spain, it is happening in Italy and it is happening in other countries," he said.

Investors are deeply concerned over Spain's banking sector, which has been thrown a 100-billion-euro rescue loan by the eurozone to fix balance sheets heavily exposed to the collapsed real estate sector.

Markets also are sceptical of Spain's targets of slashing the public deficit at a time of recession and with unemployment at 24.4% -- the highest in the industrialised world -- in the first quarter.

Even the IMF has said it doubts Spain can meet its goal of slashing the deficit to from 8.9% of economic output last year to 5.3 percent this year and 3.0% in 2013.