ROME (Reuters) - Europe must find a solution to the Spanish banking crisis that does not add to Madrid's already heavy budget deficit, French Foreign Minister Laurent Fabius said on Tuesday, reiterating Paris's support for a full European banking union.
"We have to find mechanisms, methods to bring the necessary funds to allow the system to continue to function properly without adding to Spain's budget deficit, otherwise we won't get anywhere," Fabius said at a news conference in Rome.
"If, to save the bank, you have to increase the deficit and this increase leads to higher interest rates, then it's the snake eating its tail," he said.
He said a solution should be found "through the mechanisms of a banking union, which is something we favour."
Spain, facing a widening banking crisis and a sharp increase in its borrowing costs, is pressing for a direct European rescue of its banks but is reluctant to tap an EU bailout fund that would force it to accept a direct intervention in its policy making by the European Commission.
It has faced resistance from Germany, which does not want to change current rules to allow funds from the European Stability Mechanism (ESM) to be used in direct bank recapitalisations.
The 500 billion euro ESM, the euro zone's permanent bailout fund, is due to come into force in the weeks ahead.
Reporting By Roberto Landucci; Editing by Susan Fenton