A SPANISH MINISTER has openly admitted that his country is being frozen out of the bond markets – at a time when the country’s banks urgently need recapitalisation – and has called for a full European banking union.

Cristobal Montoro, the treasury and budget minister, has admitted that the high interest rates being charged on Spanish government bonds mean the country “does not have the door to the markets open”.

The Financial Times, reporting Montoro’s remarks, notes that Spain was due to raise €2 billion in a bond auction tomorrow morning – an event which will now take on greater significance.

“The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt,” Montoro added, appealing to Europe to allow a direct line of credit to the country’s banks rather than forcing the Spanish government to recapitalise them itself.

If borrowing today on a ten-year basis, the Spanish government would be asked to pay around 6.3 per cent interest – a rate which would be considered unsustainable given the urgent need to capitalise Bankia, the country’s fourth-largest lender, to the tune of around €23 billion.

Reuters reports that the value of the euro fell in the wake of Montoro’s comments, undoing some of its gains after reaching its highest value of the week.

EU economics commissioner Olli Rehn said Madrid had not yet formally asked for European funding assistance, while sources in both Berlin and Brussels told Reuters that the EFSF, the current – albeit temporary – bailout fund, was not being geared up to offer temporary credit to Spain.

Germany has reportedly encouraged Spain to accept an international bailout in order to fund its banks, though it increasingly cuts an isolated figure as other countries argue for the separation of banking troubles from sovereign debt matters.

This morning the parliamentary head of Angela Merkel’s conservative party openly called for Spain to seek funding from the EFSF.

Volker Kauder said: “”Spain is going to have to make a decision, and I think it should seek protection from the fund… because of its banks.”

Authorities throughout Europe believe that Spain’s ultimate financial future would depend on the outcome of an audit on the needs of Spanish banks, the first results of which are due later this month.

Read: FT warns Spain against Irish path of saving the banks