By Julien Toyer
MADRID (Reuters) - Spain is determined to retain access to market funding and will push for European institutions to use available options to stabilize financial markets, premier Mariano Rajoy said, maintaining his policy stance ahead of an EU summit.
With Spain and the rest of the euro zone's 'big four', struggling to narrow their differences over how to tackle the bloc's worsening debt crisis, Rajoy also said he would fight to secure aid for the country's banks directly and without enhanced creditor status from Europe's rescue funds.
Speaking in parliament ahead of the two-day meeting of European leaders starting on Thursday in Brussels, Rajoy said Spain would not be able continue financing itself at current yields for long.
"I will propose measures to stabilize financial markets, using the instruments at our disposal right now," Rajoy said, referring to policy options such as the European Central Bank's bond-buying program and long-term funding tenders (LTROs).
Twin three-year tenders offered by the ECB in December and February unleashed over 1 trillion euros into the financial system and were credited with staving off the worst effects of the debt crisis late last year and early in 2012.
But the ECB has given no indications it is planning to offer further LTROs or revive the dormant bond-buy program, instead putting the onus on the region's governments to come up with a concerted response to the crisis.
DIRECT BANK AID
Mindful of the need to minimize the political stigma associated with a bailout after agreeing to a bank sector rescue worth up to 100 billion euros ($125 billion), Rajoy said he would keep working for a direct recapitalization of Spain's debt-scarred lenders with European funds.
That would cut the vicious circle between indebted sovereigns borrowers and weak banks.
Rajoy said Spain would continue to press to remove the preferred creditor status of Europe's permanent rescue fund, the ESM, thereby avoiding further increases of the country's debt pile and reassuring other investors they would not drop down the repayments queue.
"I will keep working to obtain a direct recapitalization of banks and to make sure the European aid doesn't override the rights of other holders of public debt," Rajoy said.
On that score, he may win support at the summit from Germany, the EU's biggest economy and paymaster, which appears ready to budge on using the rescue funds more flexibly to help banks and reassure investors spooked by the increased risk of facing writedowns on government bonds.
Spain's banks were crippled by a 2008 property crash.
Madrid is under intense pressure from nervous debt markets to tame one of the highest funding gaps in the euro zone and, to garner support within the bloc for its policy preferences, will be keen to show new austerity measures to European leaders at the summit.
Madrid said on Tuesday it was considering raising consumer, energy and property taxes to control a public deficit that may have already exceeded one of its budgeted ceilings for the full year.
"The most urgent issue is the one of financing. We can't keep funding ourselves for a long time at the prices we're currently (paying)," Rajoy said on Wednesday.
Madrid's short-term borrowing costs nearly tripled from a month ago at an auction on Tuesday, while demand shrank as investors continue to seek ever higher premiums to hold Spanish debt.
On Wednesday, Spain's 10-year debt yields were flat at 6.84 percent, still uncomfortably close to the 7 percent level that triggered full-scale bailouts for Greece, Ireland and Portugal.
(Editing by Fiona Ortiz; Editing by John Stonestreet)