SPAIN DEFIED the gloom over its shaky finances to complete a key bond sale as discreet preparations continued for a bailout plan tailored for its banks.
Madrid paid a premium at the bond auction as a senior government MEP suggested the banks may need as much as €100 billion from Europe to cleanse them of huge property-related losses.
Antonio López-Istúriz White, a leading light in the centre-right European People’s Party group in the European Parliament, said any aid package would be channelled through Spain’s bank rescue fund.
“The conditions will be for the banks and it’s up to the sovereign, elected Spanish government to take the decision,” he said.
Although Madrid warned earlier this week that it was essentially shut out of private debt markets, it still raised some €2.07 billion in an auction of bonds yesterday.
Even though the 6.044 per cent interest rate on bonds with a 10-year maturity was the highest since November, the conclusion of the sale eased some of the pressure on Spain’s borrowing costs generally.
The looming prospect of a bailout for the country has divided Europe as Germany leads the pushback against Spain’s clamour for the permanent European Stability Mechanism (ESM) fund to be given the power to rescue banks directly. In essence this means that the bailout money would not be added to Spain’s national debt, a proposal which finds support from France, Italy and Ireland.
Amid yet more tough talk yesterday from German chancellor Angela Merkel, Dutch finance ministers Jan Kees de Jager waded into the debate to argue against direct ESM aid.
According to Dutch news agency ANP, Mr de Jager said the risk in the Spanish banks would be laid directly on Dutch taxpayers in that event.
European officials believe it is more likely that Spain will receive loans from the temporary European Financial Stability Facility (EFSF) fund. The objective remains that Spain would be able to stay in regular debt markets for day-to-day government funding.
The rules of the EFSF state that any “recapitalisation loan” would be granted only in return for appropriate conditionality, but they go on to say this need not necessarily be in the context of a full-blown macroeconomic adjustment programme.
Many of the conditions would relate to the banking sector itself.
“A beneficiary country will have to adhere, at least until the loan is repaid, to the conditionality defined as part of the decision to provide a recapitalisation loan and will be subject to continuous monitoring,” the EFSF rulebook states.
The board of the International Monetary Fund will today discuss a special report on Spanish banks in a meeting which preludes the formal publication of its research on Monday.
The IMF report is the first of two indepth analyses of the banks which will guide how much capital they receive from the government. The second examination, due within a fortnight, is essentially a stress test conducted by two specialist consulting firms.
The government has reluctantly conceded that it will need external aid to complete the recapitalisation but it awaits these two reports before finalising its next move.
“In Greece, it is the insolvency of the government that has sunk the banks. In Spain, the banks are sinking the government,” wrote Daniel Gros of the Centre for European Policy Studies in a joint commentary with Dutch finance professor Dirk Schoenmaker.
“Unless the banks in both Greece and Spain are soon recapitalised, the ongoing gradual deposit flight might turn quickly into a classic run, the consequences of which are hard to imagine.”
