Eurozone Aid Fund 'Should Bypass Governments'

EU officials have called for the eurozone's emergency bailout fund to be used to directly shore-up troubled banks, by-passing national governments.

As Spain's banking problems deepened, the European Commission said that consideration should be given to using the eurozone firewall, the European Stability Mechanism (ESM), to prop up crisis-hit banks within the currency bloc.

In an annual report card on the 17-nation eurozone and the economic challenges it faces, the EU executive said: "To sever the link between banks and the sovereigns (debt), direct recapitalisation by the ESM might be envisaged."

On publishing the assessment, EU Commission president Jose Manuel Barroso said a 'banking union' should be created to centrally oversee - and if necessary bailout - the sector as part of deeper economic ties within the eurozone.

Bank failures have already overwhelmed the public finances of Ireland, forcing it to take an international bailout, and some fear Spain could be next.

Mr Barroso said: "We intend to look at the further steps we need to take towards a full economic union, to complete our monetary union.

"The Commission will advocate an ambitious approach. The 'building blocks' could include a banking union with integrated financial supervision and single deposit guarantee scheme.

"And our ideas on euro bonds are already on the table."

Sky News correspondent Robert Nisbet said: "He is talking about fundamentally changing the architecture of the eurozone and that is not going to happen overnight."

He added that it was essentially a 'mission statement', saying if the euro is to survive there has to be a much tighter economic union.

The call from Mr Barroso appeared to address market concerns about problems in the Spanish banking sector and the cost to the government in Madrid of rescuing its banks - a factor that has driven Spain's borrowing costs to near unsustainable levels.

The borrowing rate on Spain's 10-year bonds shot to a danger level of 6.703% on Wednesday as investors were rattled by fears about its financial sector.

Concern at economic chaos in Spain pushed down stock markets around the world and sent the euro crashing to a level last seen in July 2010.

Madrid is fighting to contain fears of a banking crisis, with embattled lender Bankia asking the government for 19bn euros (£15bn) in capital following a part-nationalisation of the bank earlier this month to salvage its books.

European leaders will consider the Commission's recommendations at their next meeting in June.

It also suggested Spain should be given an extra year - to 2014 - to get its budget deficit back within European targets.

Elsewhere in the eurozone, a new poll in Greece, the focal point of the eurozone crisis, put the radical left wing party Syriza in the lead ahead of the June 17 elections.

The party, which says it wants the debt-laden country to remain in the euro but to ditch austerity, would win almost a third of the vote if elections were held now.