European Central Bank executive board member and chief economist Peter Praet believes that the decision to create a European banking union has already started to stem the serious flight of capital from Spain.
In an interview with French daily Le Figaro published on Wednesday, Praet said the banking union, which is planned to be up and running by March 2014, will help reactivate the interbank market, cross-border financial flows and the real economy. He said Spain is one of the countries that is starting to see the benefits of the move, with funds already flowing back into the country.
“Between December of 2011 and August of 2012 (Spain) suffered huge outflows of capital of 300 billion euros, to which must be added the 100 billion more that left the previous year,” Praet noted. “The lack of confidence was so great that the directors of a Spanish bank arranged things to place cash with their foreign subsidiaries while client deposits were also emigrating.”
The Belgian representative in the ECB did not name the Spanish bank. “Most happily, we have found that since the summer 40 to 50 billion euros have returned to Spain,” he said. He attributed this to two factors.
"Firstly, the southern (European) countries, Portugal, Italy and also Ireland (sic) are moving toward equilibrium in their balance of payments, which shows that budget sanitary operations (cutbacks) and an improvement in the competitiveness of the peripheral countries are working,” he said.
“Secondly, the prospect of a banking union offers security; in the future, the health of the banks will no longer depend on their countries of origin,” he added.
Under the banking union arrangement agreed by the latest EU summit earlier this month, the ECB will be the sole supervisor of banks with more than 30 billion euros in assets, those that are nationalized or whose size is greater than 20 percent of the GDP of the country where they are headquartered. More than 90 percent of banks in Spain fall within those criteria.
Asked about the possibility of a full bailout for Spain, Praet said that was up to the government of Prime Minister Mariano Rajoy. “This wouldn’t be a bailout by the ECB, but rather setting in motion a program of monetary interventions once the International Monetary Fund and European Stability Mechanism program is set in motion,” he said.
In the case of opting to ask for a bailout, Praet advised the Spanish government that it would be “preferable” to do so during a period when tensions in the financial markets have dissipated.
Rajoy reiterated on Wednesday that his government has no immediate plans to seek a bailout. “We have taken the decision not to ask for it and that is a decision and it doesn’t signify that in the future we won’t take the decision to ask for it,” he said.