Spain capital flight doubles as risk of European bailout rises (+video)

Distraught Spain is playing a high-stakes game of chicken with the European Union, using to its advantage the likelihood that it will drag Europe and the rest of the world into a downward economic spiral if it doesn't get the funds it needs to keep its banks afloat. 

“The battle for the euro is being waged now in very important countries like Italy and Spain,” Spanish Economy Minister Luis de Guindos said yesterday.

Spain faces a raft of economic problems, but the government insists that if the European Central Bank provides the lifeline that Spain's reeling banks need, the other issues will resolve themselves because structural reforms to the economy are already in place. All it needs, other than affordable credit, is time, the government says.

But the fiscal conservatives, led by Germany, are not flinching.

Spain, Europe’s fourth biggest economy and home to some of world’s biggest banks, is neck-deep in a crisis that has bled into just about every aspect of daily life. There is little cash, the economy is shrinking, there's no credit, and pessimism abounds. People are wondering what currency to convert their savings to and how to open bank accounts in Switzerland, an unthinkable scenario just a year ago.

Spain says it needs around 50 billion euros to recapitalize its banks, but it’s unclear where the money will come from. Mr. de Guindos said that “in the next few days, very important steps will be taken” to inject money directly into European banks – something that European authorities have so far rejected.

Spain's Central Bank said today that capital flight in March surged to 66 billion euros, double the previous record set in December 2011, before the worst of the country’s economic problems were exposed.

The Spanish government says that the remedy for the situation is not more reform but cash at affordable rates to jumpstart the economy – something that only the ECB can do. The cost of borrowing has broken records this week and is slowly climbing to the unsustainable rate of 7 percent for a 10-year government bond. The money saved by steep budget cuts is increasingly going to cover the higher cost of government borrowing and the deficit is growing. The benchmark stock index is at its lowest point for decades. And this is all likely to worsen.

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