SPAIN FACED the consequence of increased state support for its stricken banks as a spike in its borrowing costs raised yet more questions over the country’s capacity to continue funding itself on the open market.
Although premier Mariano Rajoy denied again that external aid might be required, he made public his push for Europe’s bailout funds to be given new powers to rescue banks directly.
Such a measure is being resisted by Germany, whose chancellor, Angela Merkel, appears increasingly hemmed in by her own government allies as public support grows for the opposition social democrats.
The latest phase of Spain’s banking crisis opened last Friday when increased property-related losses led the Bankia group of former savings banks to seek a €19 billion capital injection from the government on top of a previous pledge of €4.5 billion.
Madrid hopes to achieve the recapitalisation by providing government-backed debt to Bankia, avoiding an upfront cash payment but increasing the government’s overall indebtedness at a time when foreign investors have been selling Spanish bonds.
Bankia’s shares slumped yesterday and the interest rate on Spanish 10-year bonds rose 0.19 percentage points to 6.5 per cent, taking the country’s borrowing cost another step closer to the 7 per cent rate that precipitated the Irish and Portuguese bailouts.
The pressure on Spain weighed on the euro and on stock markets even after a Greek opinion poll suggested a turn to pro-bailout parties in the election rerun.
The increased likelihood of other Spanish lenders needing further state aid has fanned anxiety that Mr Rajoy’s government might be overwhelmed by the banking crisis. Madrid has initiated an external stress test on the banks, suggesting some kind of a reckoning is imminent.
“The external review of the Spanish banking system could identify a significant capital shortfall and the need for government support, something else Spanish banks could be ‘importing’ from Ireland,” said Daragh Quinn, analyst with Nomura bank in London.
“The recapitalisation needs could amount to between €50 billion and €60 billion. Given the current economic and political uncertainties facing the euro zone, this could see additional pressure on Spain to consider using external funds for the bank recapitalisation.”
Although euro zone and other officials share this analysis, Mr Rajoy insisted Spain would get by on its own. He blamed the present market strains on difficulties in the single currency area. “There are major doubts over the euro zone and that makes the risk premium for some countries very high. That’s why it would be a very good idea to deliver a clear message there’s no going back for the euro.”
For weeks Mr Rajoy has privately agitated for the European Stability Mechanism fund to be empowered to recapitalise banks directly but he stepped up the campaign yesterday by making his demand in the open. “Lots of people are in favour of that, and I certainly am,” he said.
Taoiseach Enda Kenny, who met Mr Rajoy before last week’s EU summit, has already declared his support for the notion. The money used for any direct recapitalisation of Spanish banks by the ESM would not go on to the country’s national debt, potentially setting a precedent for Ireland to ease the burden of its bank bailout. There is little enthusiasm for this in Germany, however.
Even amid uncertainty over the fate of Greece and contingency planning for its possible exit from the euro, Dr Merkel has refused to entertain talk of a new ESM mandate or jointly issued eurobonds.
The latest figure to rule out a concession on that front was Rainer Brüderle, chief Bundestag whip for the chancellor’s pro- business Free Democrat coalition partner. He told Die Welt that eurobonds were a form of socialism “for which Germany and other successful countries would have to pay dearly”.
Attitudes towards the bailout policy are also hardening within the Christian Social Union, Dr Merkel’s government partners in Bavaria. CSU MP Hans Michelbach said Europe should suspend aid to Greece because political developments in the country had raised serious doubt over the austerity measures it must implement under the EU-IMF plan.
