GROUP OF Eight leaders received a stark reminder of the turmoil in the euro zone as new data showed rising bad loans in Spain’s banks, and an EU commissioner hinted at contingency planning for a Greek exit from the currency.
The remarks by trade commissioner Karel De Gucht were quickly dismissed by the commission, which denied any preparations for Greece to leave the euro.
However, they concur with a string of warnings from euro zone countries that Greece’s membership of the euro is on the line in next month’s election.
“A year and a half ago there may have been the danger of a domino effect,” Mr De Gucht told the Dutch-language Belgian paper De Standaard.
“But today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn’t make it.”
With Europe’s financial woes the focus at the G8 summit in Camp David, news that Spanish bad loans have risen to an 18-year high underscored the weakness of its banks on the day after Moody’s downgraded 16 of the country’s lenders.
Spain is struggling to maintain investor confidence as it battles record unemployment and the impact of a property crash on its frail banking system.
Spanish prime minister Mariano Rajoy is due to meet German chancellor Angela Merkel tomorrow on the sidelines of a Nato summit in Chicago, talks that come three days before an EU summit in Brussels next Wednesday.
Some senior European officials believe Spain may need a bailout to recapitalise the sector, but EU economics commissioner Olli Rehn argued to the contrary yesterday, saying the country’s banking crisis was not comparable to Ireland’s. “Spain has the starting point that it can deal with this challenge on its own without resorting to European assistance,” Mr Rehn told Bloomberg TV.
“Spain is not comparable to, for instance, Ireland, which had a banking sector many times larger compared to gross domestic product.”
While Mr Rehn said Madrid was taking very decisive action to clean up the sector, figures from the Bank of Spain showed the fallout from the housing bubble continues to escalate.
Bad loans rose to 8.37 per cent of banks’ outstanding loans in March, up from 8.3 per cent in February and the highest since the summer 1994.
Worries about the banks have undermined confidence in Spain’s sovereign debt as investors weigh the prospect of further state interventions to prop up the sector.
In an attempt to convince doubters in international markets about its willingness to confront the problem, Mr Rajoy’s government will appoint external auditors next Monday to carry out a detailed stress test.
Amid scepticism about the existing plan to rescue the sector, this exercise is designed to provide clarity over the exact amount of capital the banks will need.
Separately, the Cypriot parliament approved legislation to underwrite a €1.8 billion equity issue by the country’s second-largest lender, Cyprus Popular Bank.
The manoeuvre is designed to avoid any requirement for aid from Europe’s rescue funds. Popular Bank endured heavy losses on its holdings of Greek bonds when Greece’s national debt was restructured in February.
Cypriot banks are heavily exposed to the Greek economy, making it vulnerable to any escalation of the political crisis in Athens. Cyprus received an emergency bilateral loan last year from Russia.
