SPAIN EDGED closer to an international bailout after the country declared it will need emergency aid from Europe to rescue its banks.
The banks incurred huge losses in a property crash similar to that in Ireland, fanning anxiety that their increasing need for new capital could overwhelm the recession-struck Spanish state.
After insisting for weeks that it could prop up the banks without external help, the government acknowledged publicly for the first time yesterday it would not be able to overcome the problem on its own.
The prospect of the fourth-largest euro zone country following in the steps of Ireland, Greece and Portugal raises serious problems for the EU authorities as they try to contain the expanding debt debacle. The fear remains that any European intervention in Spain could trigger an upsurge of market pressure on Italy.
Finance ministers from the Group of Seven industrialised powers took stock of the situation in the euro zone in an emergency teleconference yesterday but stopped short of any initiative to tackle the crisis.
The euro fell against the dollar as attention turned to today’s meeting in Frankfurt of the European Central Bank (ECB), which has spurned pressure for interventions to calm restive markets.
High-ranking euro zone officials said Spain was very unlikely to apply for a full-blown EU-International Monetary Fund (IMF) loan programme. They said it was more likely to seek a package tailored for its banks while trying to remain in regular bond markets for day-to-day funding.
Europe is deeply divided on this question, however, as Germany holds out against a Spanish-led clamour for the European Stability Mechanism (ESM) bailout fund to be able to rescue banks directly.
The money would not go onto Spain’s national debt in any such scheme. This would be different from a conventional bailout arrangement in which money from the ESM or European Financial Stability Facility would be released first to the government and added to its debt.
Taoiseach Enda Kenny sees attractions in direct bank aid but Berlin’s opposition to new a ESM mandate comes alongside its resistance to any reopening of the Irish bank plan. After Germany made its position clear yesterday, Mr Kenny said the EU had other issues to address before an Irish deal could be discussed. In Riga yesterday, however, EU commissioner Olli Rehn left the door open for an eventual deal.
“I believe it is possible to look for better solutions to the problems of restructuring and recapitalising the Irish banking sector – but I wouldn’t want to go into technical details at this stage,” he said.
Spanish budget minister Cristóbal Montoro insisted the country’s banks did not require excessive amounts of capital but said a spike in borrowing costs meant Madrid was in effect shut out of private debt markets.
The big question was where the money for the banks would come from, Mr Montoro added.
“That’s why it’s so important that the European institutions open up and help us achieve, help facilitate, that figure because we’re not talking about astronomical figures,” he said.
“What we need is for the European institutions to get going and seek that bank recapitalisation through those procedures that mean more Europe.”
The banks are under close scrutiny in a stress test by external auditors hired by Spain. The IMF is carrying out a separate study. Some euro zone officials believe Madrid will not make its next move until the result from these audits is known in the middle of the month. Mr Montoro’s remarks marked a shift by the government, which has urged the ECB to buy more of its sovereign bonds.
Spanish prime minister Mariano Rajoy said the ECB’s bond-buying programme last year had brought relief. “The most urgent and important thing is we have a problem of financing, of liquidity and of debt sustainability,” he said. “That doesn’t depend just on us.”
