BANKING CRISIS

G20 leaders urge Spain to make formal bank bailout request

Spanish need “clarity” in their application for EU aid, says Merkel EU working on ways to limit impact of bailout, says source Treasury sells 3.04 billion euros in short term bonds

Madrid - 19 Jun 2012 - 18:55
Prime Minister Mariano Rajoy greets President Barack Obama on Tuesday in Los Cabos, Mexico.
Prime Minister Mariano Rajoy greets President Barack Obama on Tuesday in Los Cabos, Mexico.Diego Crespo (EFE)

G20 leaders meeting in Mexico on Tuesday urged Spain to officially ask for European aid so that the country can move quickly to shore up its ailing banking sector.

Speaking to reporters in Los Cabos, Mexico, German Chancellor Angela Merkel said she believed that Spain will make the formal request “soon.”

“All agreed that once the audit results are available, then Spain should make its application as soon as possible,” Merkel said. “We also talked about how we need clarity on Spain’s application. We all know that banks that are not properly capitalized are the source of turmoil and risk for the economy.”

The conclusions from two independent auditors, Oliver Wyman and Roland Berger, are expected to be released on Thursday when euro finance ministers meet in Luxembourg to discuss the terms of the Spanish bank bailout. On June 9, European finance ministers offered up to 100 billion euros to recapitalize the Spanish banking industry.

There was no immediate reaction to Chancellor Merkel’s comments from Prime Minister Mariano Rajoy, who was also in Los Cabos, nor from any officials in his Popular Party (PP) government.

In Madrid, the backlash continued against Rajoy for having presented the rescue plan as a great success, and assuring Spaniards that the “credit line,” as he called it, was a victory for the euro that would clear up all doubts about the future of the single currency.

All the opposition parties on Tuesday demanded that Rajoy appear before Congress as soon as possible to explain the bank bailout deal. Soraya Rodríguez, the Socialist spokeswoman in Congress, said Rajoy “lied” when he said that the rescue plan wouldn’t have any affect on national debt.

“He presented it as if we had won the lottery,” she said, repeating an assessment made by Socialist leader Alfredo Pérez Rubalcaba.

But a top European official told Reuters that the EU is working on a formula to limit the impact of the bank rescue on Spain’s public deficit by issuing long-term loans at very low rates.

“It will raise the deficit, but not by as much as some fear, and the markets will understand what we are doing,” the official said on the sidelines of the G20 summit.

The lack of information about the bank bailout terms has had a tremendous affect on the markets, which have continued to punish Spain’s sovereign debt, among other reasons because the 100-billion-euro bailout is not going to be pumped directly into the banks, but rather through the government’s Orderly Bank Restructuring Fund (FROB). This means that Spanish debt levels may rise as high as 90 percent of GDP.

On Tuesday morning, at the Treasury’s first bond auction since news of the bailout broke, Spain’s borrowing costs jumped on 12- and 18-month paper. The government managed to raise the 3.04 billion euros it was aiming for, but at a yield of 5.1 percent. A similar debt sale in May saw a rate of three percent.

But the markets were given a boost on Tuesday. The yield on Spain’s 10-year debt in the secondary markets closed at 7.04 percent, with the risk premium at 551 basis points over the benchmark German bund, 23 points lower than Monday. The blue chip Ibex 35 was up 2.67 percent, closing at 6,693.9 points.

The treasury is hoping to sell up to two billion euros in longer-term bonds on Thursday.

Rajoy, who has said that he won’t appear in Congress until next month, spoke to leaders at the G20 summit on Monday about the need to “break the link between bank risk and sovereign risk,” which, he said, has “turned out to be incredibly damaging,” according to sources.

These words are a clear return to the former stance of the Rajoy government — the need for a direct injection into the banks to avoid the debt being borne by the state.

While Rajoy was denying it last week, Spain has been pressing for direct help for its banks. But Germany and other countries refused, and insisted that the bailout be implemented via the FROB state fund. European sources on Tuesday said that there is a “strong preference” among the euro-zone countries to grant the money via the permanent rescue fund (ESM).

When the Eurogroup ministers meet on Thursday in Luxembourg, they will discuss the “strict conditions” that will come with the bailout, including the possible sale of bank assets, the need to merge or liquidate banks, and the obligation of stepping up the restructuring of banks, in particular the former savings banks, or cajas.

“According to the rules and procedures that are in place, a direct recapitalization program is not possible,” a high-level official said. “I know that there are hundreds of people saying that it is, but it isn’t.”

Rules
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