Spain’s risk premium at new high despite Brussels reprieve

Amid an array of confusing messages on the merits of Bankia’s bailout plan, which caused Spain’s risk premium to hit yet new highs, the European Commission on Wednesday brought a measure of ephemeral relief by embracing the idea of banks being allowed to tap European rescue funds directly.

The International Monetary Fund at its last General Assembly suggested that European banks should be able to go directly to the European Stability Mechanism (ESM) without the need for the government of their countries to formally apply for assistance.

“To sever the link between banks and the sovereigns, direct recapitalization by the ESM [European Stability Mechanism] might be envisaged,” the EC said in a policy recommendations report released Wednesday. EC President José Manuel Barroso also told a news conference that the euro-zone integration could move toward a banking union.

Prime Minister Mariano Rajoy is also in favor of the banks bypassing governments to tap the ESM as this would save him the political ignominy of having to go cap in hand for assistance. At the same time, Rajoy has categorically ruled out a rescue package for the Spanish banking system.

The Commission’s comments on direct access to the ESM helped the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent ease somewhat from a euro-era high of over 539 basis points. However, the German government’s rejection of the Commission’s idea pushed it back up to another new high of over 540 basis points, above the level that forced Portugal to seek a rescue package from the IMF and the EU.

To sever the link between banks and sovereigns, direct recapitalization by the ESM might be envisaged”

Government spokesman Steffen Seibert said Germany’s position on the use of the ESM is “well known,” while the European Union commissioner for economic affairs, Olli Rehn, said direct EU aid to the banks is “not an option” under the current regulations, suggesting there would be no change anytime soon.

The blue-chip Ibex 35 closed down 2.58 percent at 6,090.40 points, down to levels of nine years ago.

The Financial Times on Wednesday quoted unnamed European sources as saying that the ECB categorically rejected the Spanish government’s idea of injecting the additional 19 billion euros Bankia and its parent Banco Financiero y de Ahorro (BFA) directly in the form of government bonds rather than tapping the markets to get the funding to clean up the balance sheet of Spain’s fourth-largest bank.

However, Economy Minister Luis de Guindos denied that the government plans to go ahead with this funding plan.

The ECB added to the confusion by issuing the following press release: “Contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalize a major Spanish bank. The ECB stands ready to give advice on the development of such plans.”

Before that, the bank had issued a draft statement that included a line saying: “It should be noted, however, that the funds needed to ensure banks’ compliance with capital requirements, cannot be provided by the Eurosystem.” The ECB subsequently retracted the wording of that text.

De Guindos confirmed that the government had not presented any plan to the ECB on funding Bankia’s bailout “because it does not have to do so.” He said the injection of funds in Bankia will be done through the Orderly Bank Restructuring Fund (FROB).

“The mechanism is the same as usual, the one used for previous injections,” De Guindos said in Congress. “The FROB will tap the capital markets, and to the extent that is required, will inject capital.”

Amid an array of confusing messages on the merits of Bankia’s bailout plan, which caused Spain’s risk premium to hit yet new highs, the European Commission on Wednesday brought a measure of ephemeral relief by embracing the idea of banks being allowed to tap European rescue funds directly.

The International Monetary Fund at its last General Assembly suggested that European banks should be able to go directly to the European Stability Mechanism (ESM) without the need for the government of their countries to formally apply for assistance.

“To sever the link between banks and the sovereigns, direct recapitalization by the ESM [European Stability Mechanism] might be envisaged,” the EC said in a policy recommendations report released Wednesday. EC President José Manuel Barroso also told a news conference that the euro-zone integration could move toward a banking union.

Prime Minister Mariano Rajoy is also in favor of the banks bypassing governments to tap the ESM as this would save him the political ignominy of having to go cap in hand for assistance. At the same time, Rajoy has categorically ruled out a rescue package for the Spanish banking system.

The Commission’s comments on direct access to the ESM helped the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent ease somewhat from a euro-era high of over 539 basis points. However, the German government’s rejection of the Commission’s idea pushed it back up to another new high of over 540 basis points, above the level that forced Portugal to seek a rescue package from the IMF and the EU.

Government spokesman Steffen Seibert said German’s position on the use of the ESM is “well known,” while the European Union commissioner for economic affairs, Olli Rehn, said direct EU aid to the banks is “not an option” under the current regulations, suggesting there would be no change anytime soon.

The blue-chip Ibex 35 closed down 2.58 percent at 6,090.40 points, down to levels of nine years ago.

The Financial Times on Wednesday quoted unnamed European sources as saying that the ECB categorically rejected the Spanish government’s idea of injecting the additional 19 billion euros Bankia and its parent Banco Financiero y de Ahorro (BFA) directly in the form of government bonds rather than tapping the markets to get the funding to clean up the balance sheet of Spain’s fourth-largest bank.

However, Economy Minister Luis de Guindos denied that the government plans to go ahead with this funding plan.

The ECB added to the confusion by issuing the following press release: “Contrary to media reports published today, the European Central Bank has not been consulted and has not expressed a position on plans by the Spanish authorities to recapitalize a major Spanish bank. The ECB stands ready to give advice on the development of such plans.”

Before that, the bank had issued a draft statement that included a line saying: “It should be noted, however, that the funds needed to ensure banks’ compliance with capital requirements, cannot be provided by the Eurosystem.” The ECB subsequently retracted the wording of that text.

De Guindos confirmed that the government had not presented any plan to the ECB on funding Bankia’s bailout “because it does not have to do so.” He said the injection of funds in Bankia will be done through the Orderly Bank Restructuring Fund (FROB).

“The mechanism is the same as usual, the one used for previous injections,” De Guindos said in Congress. “The FROB will tap the capital markets, and to the extent that is required, will inject capital.”