Rajoy urges Europe to speed along rescue plan for Spanish banks

Germany’s Schäuble says EU banking reforms will not be ready until next year Prime minister also accepts need for further cutbacks on the domestic front

Prime Minister Mariano Rajoy is bracing himself for a difficult week that begins with a European negotiation of the Spanish bank bailout and ends with a Cabinet meeting expected to approve a new wave of unpopular spending cuts.

With the banking sector hard hit by a property bust that left its books full of devaluating real estate, Spain is anxious to get the up to 100-billion-euro credit offered by Brussels to recapitalize the banks.

“Europe must honor the agreements with as much haste as possible,” Rajoy said this weekend, in a clear reference to the bank rescue package. “We can only move forward when consensus is not questioned. We are at a decisive moment. I hope Europe is up to the task.”

Euro-zone leaders agreed at a summit last week in Brussels to allow the bloc’s European Financial Stability Facility (EFSF) and its planned permanent replacement, the European Stability Mechanism (ESM), to directly recapitalize banks.

However, it is unlikely that the credit line for the Spanish banking industry -- technically it is not a full-blown state bailout as in Greece, Ireland or Portugal because the money does not go directly to the Spanish state -- will be ready any time this year.

At least, not according to Germany’s Finance Minister, Wolfgang Schäuble, who talked to EL PAÍS just ahead of Monday’s all-important Eurogroup meeting.

Direct access to funds will not work without a supervisor to control the banks"

“There’s a time for everything,” said Schäuble, noting that the first step is to implement a common and efficient bank supervisor participated by the European Central Bank (ECB). After that would come a discussion of how to let banks have direct access to Europe’s stability funds. “It will not work without a supervisor to control the banks, their use of the aid and the fulfillment of conditions. But the supervising body will not go into effect this year. That is not very realistic.”

Asked whether the money might be ready in 12 months, the minister was vague.

“The ECB says it could take a while. Besides, Spain and other countries want the supervision to include all banks. The ECB says this exceeds its current capacity. In order to be able to act now, we agreed for the [Orderly Bank Restructuring Fund] FROB to make the request as an agent of the Spanish government. The money will come out of the provisional fund, the EFSF, because the permanent ESM is not ready yet.”

What European leaders will do on Monday, Schäuble noted, is to receive reports by Spanish Economy Minister Luis de Guindos and by the troika (IMF, European Commission and ECB) regarding the state of the negotiation to implement what was agreed earlier at the political level.

“Spain has specific problems with its banking sector due to the bursting of its real estate bubble. That is why we want to support it in the recapitalization of its banks with the EFSF stability fund. We encourage Spain to embark on that path,” said the German minister.

Schäuble also underscored that Spain has “made brave decisions” and that the structural reforms undertaken so far are bearing fruit in the form of lower labor costs and growing exports to Germany. “It is a good development, but it will take time to produce even more positive effects.”

If we take this budget as a basis for 2013, it is like cheating at solitaire”

Yet it is becoming increasingly apparent that more reforms -- meaning more cost-cutting measures -- are going to be necessary soon if Spain wants to meet the deficit target of 5.3 percent of GDP by the end of this year. The Spanish Finance Ministry is well aware that the pension system could end 2012 with a significant gap, that the regions’ accounts remain suspect despite their pledge to save up to 18 billion euros, and that real revenues are going to be well below expectations.

In fact, the delayed 2012 budget has only been in effect one week, and already there is talk of making changes to it.

“We need to review this year’s budget. If we take what we have now as a basis for 2013, it will be like cheating ourselves at a game of solitaire,” said Juan José Rubio, a professor of public finance at the University of Castilla-La Mancha.

Slimming down the public workforce, reducing public salaries, eliminating regional agencies, raising indirect taxes (chiefly VAT) and fighting tax fraud are some of the options on the government’s table now that health and education budgets have already been reduced and labor reforms undertaken. The new measures will be announced “in the days to come,” said Rajoy, whose strategy against the constant outside pressure has so far been to shift most of the responsibility onto EU authorities and to point out that Spain is doing its homework. “There is no choice but to do it this way.”

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