Spain aims to keep bank aid loans off govt books

AP News
Posted: Jun 22, 2012 11:45 AM
Spain aims to keep bank aid loans off govt books

MADRID (AP) — Spain is pushing to have European rescue funds go directly to its troubled banks, rather than through the government, so that they do not add to the country's already heavy sovereign debt load and push it closer toward financial collapse.

The country has access to as much as €100 billion ($125 billion) for the banks, but current rules say the government needs to take responsibility for them. That has raised fears that, should the government not be able to get the money back from its banks, it will be overwhelmed by the new debt and need a bailout of its own.

"Right now there is no instrument to inject capital directly to banks. That's the reality, "said Economy Minister Luis de Guindos in Luxembourg. But he said momentum is building toward creation of a European banking union with the independent firepower to bail out banks, bypassing national governments.

De Guindos said such a banking union would include greater cooperation on oversight of banks, a common fund to guarantee deposits and new instruments to rescue ailing banks directly. He acknowledged that setting up such a banking union would take time, but said Spain will be pushing to have such terms apply to its banks' bailout.

"It's not something available today but it could be in the near future," he said.

A day earlier, two independent audit reports estimated that Spain's troubled banks would need a maximum of €62 billion ($77.74 billion), out of the €100 billion ($125.39 billion) the European Union has offered, to survive a severe economic downturn.

The International Monetary Fund backs the idea of a single European fund injecting funds directly into needy banks but key EU member Germany has so far ruled it out. Berlin insists on abiding by current regulations under which the money must be given to a government, adding to its sovereign debt pile.

De Guindos earlier said the possibility of direct funding was "a fundamental question that we will have to make progress on over the coming weeks."

He said the size of the bank bailout Spain will request will be determined and published July 9, when Spain and its single currency partners reach agreement on the terms of the loan, such as the interest rate. He estimated the rate would be around 3-4 percent. A letter formally requesting the loan will be delivered Monday but it will be only two paragraphs long, with no mention of terms or amount.

The independent audit reports were initially met with caution in financial markets on Friday, with investors continuing to demand high interest rates for Spanish bonds, an indicator of what the government would have to pay in official debt auctions.

Market pressure did ease over the course of the day, however, as de Guindos hinted Spain would push for the bank loans to not add to government debt.

After rising in the morning, the benchmark 10-year bond yield was down 0.19 percentage points at 6.35 percent, a still painfully high rate.

Concern that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999.

The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country. Spain is the eurozone's fourth-largest economy and a sovereign bailout would seriously test the bloc's finances. The country is struggling through a recession with a 24.4 percent jobless rate.

The government ordered the audits, carried out by Oliver Wyman Inc. and Roland Berger Strategy Consultants GmbH, as an act of transparency in the hope their results would calm markets. The amount cited is only in a worst-case scenario, but some analysts said the Spanish economy's outlook is so bad that the assumptions may be conservative.

Four other international auditing firms will now carry out more exhaustive audits of each bank by July 31. Based on these, a round of stress tests will then be held on each entity in September. Banks then seen to be financially unsound will be given 15 days to come up with restructuring plans and, if approved, nine months to fulfill them.

Analyst Michael Hewson of CWC Markets said there may be some skepticism of the first audits' estimates because the data was obtained from the Bank of Spain and not through examination of the banks' books themselves.


Daniel Woolls and Alan Clendenning contributed to this report.