Spain: Resisting a bailout

Demonstrators shout slogans against the government during a protest in front a Bankia bank branch in Barcelona, Spain, Saturday June 2, 2012 Spain has seen months of demonstrations against unemployment levels and austerity measures

They are playing defence in Madrid. And the moves are familiar. They have been played before in Ireland, Portugal and Greece.

The denials become ever more insistent that a bail-out is not needed. "The men in black will not be coming to Spain," said a senior minister yesterday.

Yet the cracks are showing.

There was the admission by Spain's budget minister that the country has all but been shut out of the credit markets, making it difficult to finance its needs.

The Spanish Prime Minister Mariano Rajoy has openly appealed to Europe to "support those that are in difficulty". That sounded like a prime minister running out of options.

Then there are the whispers - denied - that Germany is urging Spain to accept a rescue just for its banks. When Angela Merkel's spokesman was asked about it he did not exactly close the rumour down.

He said of Spain that "everyone knows that Europe is ready (to help)... but the decision lies with the Spanish government alone".

Black hole

Some in Europe would like the government in Madrid to apply to the main bailout fund, the EFSF, to rescue its banks. Their motive is that a bank bailout might prevent a full Spanish rescue - a much more problematical operation that would risk spreading instability to Italy.

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What Madrid would like is for its banks to borrow directly from the rescue fund - the EFSF. That would enable the government to deny it was seeking a bailout”

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Spain is facing a black hole in its banks, caused by the property crash. It does not know what bad loans are hidden there.

Some suggest it could be as much as 180bn euros. Government officials I have spoken to suggest the figure is much less. About 60bn euros. The head of Banco Santander says the troubled banks would need 40bn euros.

Spain is in a bind. It is struggling to reduce its budget deficit whilst in recession and facing unemployment of 24%. Targets have already been missed.

It has 44bn euros in reserve and can meet its obligations for months.

Furthermore the country has already financed the majority of the funding it needs this year. Only another 82bn has to be raised.

None of that deters investors from concluding Spain cannot service its debts, support its banks and its impoverished regions.

What Madrid would like is for its banks to borrow directly from the rescue fund - the EFSF. That would enable the government to deny it was seeking a bailout.

The political fall-out would be much less. The conditions would be easier. That, however, cannot be done under existing rules. Only governments can borrow from the fund. The Germans believe that ensures that governments are held accountable for using the loans and for abiding by strict conditions.

Spain is lobbying hard for its banks to be able to access the fund directly. "What's at stake," said one minister, "is the European project of the euro," a familiar refrain when countries or officials need help.

Banking union

Spain has joined the chorus calling for a banking union. It is but the latest of many plans to save the eurozone. They are usually launched in the weeks before a summit and their importance often diminishes later.

But a banking union is the idea of the moment. There would be monitoring of banks at an EU level. Deposits would be guaranteed on a pan-European basis and there would be a fund to wind down big banks. One of the major attractions is that a eurozone banking union would avoid investor flight or bank runs in one country.

The EU Commission will launch the first step towards a banking union later today when it proposes new powers for dealing with failing banks. What the Commission wants to do is to break the link between bailing out banks and governments. (Ireland transferred the debts of its banks on to the public books and pushed the country towards bankruptcy.)

The French, the Italians and the Spanish are already backers of a banking union. They believe that if the eurozone takes responsibility as a whole for propping up failing banks it will go along way to ending the banking crisis.

Germany is cautious, however. Angela Merkel - earlier this week - accepted the idea of much greater European supervision of cross-border banks. But Germany will not currently accept guaranteeing deposits or a new fund to wind up failing banks. German voters are likely to resist using their money to bail out foreign banks. It is a familiar story; eurozone governments backing a plan that depends on German taxpayers footing the bill.

A banking union will be on the agenda at a summit later this month, but even if all the obstacles were overcome it is unlikely to be in place to help Spain.

By saying that it is essentially shut out of the credit markets, Spain hopes to put pressure on the ECB - which meets later today - to resume its bond-buying programme.

That would help reduce borrowing costs. What Spain really wants is for the eurozone to agree to banks being able to borrow directly from EU funds.

There may be a halfway house. A German paper says that European officials are examining offering Spain a precautionary credit line from the EFSF to help it raise funds. That would buy Spain time whilst being able to claim it had not sought a bailout.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 307.

    306 QOT

    Thanks. I do know what they are, but I will read the link because I'm sure there's a lot I don't know.

    Have to go--time to make clam chowder.

  • rate this

    Comment number 306.

    #305 d_m

    American Depository Receipts

  • rate this

    Comment number 305.

    303 QOT

    I think blue chips are about as good as you can do right now. ADR--alternative dispute resolution? Just kidding. I'll check it out. My German is worse than pretty rust after 45 years in mothballs. Should be an interesting experience.

    No gold for me--except for the my new gold tooth.

  • rate this

    Comment number 304.


    -- who has ever defaulted while owning printing presses ?

    -- I would not look down at Europe with its industries, much healthier and larger population, generally better trained and less rampant poverty.

    -- things just aren´t as before.

    -- It would be dangerous for America not to acknowledge a changing world --as China and Asia play the Globalization card.

  • rate this

    Comment number 303.


    -- My friendly broker suggested only blue chips -- as even if the world collapses -- they will produce something to sell. Many of the European ´biggys´have ADR´s ($). Have a look at Bondboard (google translation?) for bonds -- Hugo for instance has always paid (not suggesting)

    --I see the gold bugs have increased their portfolio% up to 20% --also not for the fainthearted.

  • rate this

    Comment number 302.

    300 Suilerua

    True, even when they have to pay to put it there.

  • rate this

    Comment number 301.

    298 QOT

    It'll no doubt get worse. Markets hate uncertainty and right now a lot of it is emanating from Europe. Later it will shift to this side of the Atlantic as budget negotiations come up for a vote. I think you're right though; it's the hiccups sandwiching us on the way down that will get us in the end.

    When things have gone south on both sides of the Atlantic and Pacific...

  • rate this

    Comment number 300.

    299 Smart money is in short term US treasury obligations.They are by far the safest place to put money in the world. If the US defaults, nothing else matters, there simply won't be an economy. If Europe collapses on the other hand, life will go on. We'll adjust. Things may be difficult for awhile but the world will not end. As for Europe....I will not lose even one wink of sleep worrying about it

  • rate this

    Comment number 299.

    #296 d_m

    My friendly broker just asked me why when I invest for my wife -- she comes out with a plus --and for myself always a minus ?

    -- even the financial websites that were usually pretty good --are now mostly a disaster. My German one was (is) Bondboard in Germany (for bonds) -- in various currencies (and countries)

    -- But even there the experts report mainly more losses than profits.

  • rate this

    Comment number 298.

    297 QOT

    Yup, I think you nailed it. Especially the hiccup part. I'm still laughing about that. Interesting imagery.

  • rate this

    Comment number 297.

    Spiegel Online (German)

    350 of the largest German ´Mittelstand´ Family businesses do not want Germany to sign up to the ESM fund.

    -they are also against Eurobonds

    Sul -- Germany has AAA and your village ?

    -- not exactly a songbird ?

    -- What bothers me is that everything one does or doesn´t do is wrong --nothing is predictable --except the hiccups that ´sandwiches´ me on the way down.

  • rate this

    Comment number 296.

    295 Suileura

    Are you suggesting we're seeing postmortem movement?

  • rate this

    Comment number 295.

    The EU no longer needs a rating agency. What it needs now is a coroner.

  • rate this

    Comment number 294.

    292 QOT

    LOL. 'CCC' huh? Probably more accurate anyway. It's about what my investments are turning into.

    Haven't heard about the owl yet, will let you know; it was a barn owl. See this link to hear their calls and find out more info, if you are interested.

    You've probably seen them (wherever it is you are and have been, or might be).

  • rate this

    Comment number 293.

    Margaret, Fitch is a French firm. The reason the EU wants it's own rating agency is to control what it says. If it is not independent, do you really think it will have any plausibility.

  • rate this

    Comment number 292.

    #289 d_m

    -- Bird is OK ?

    I´ve solved the rating problem -- everything is going down and is CCC until further notice.

  • rate this

    Comment number 291.

    283 margaret howard, Europe sure fell for that trick didn't they? They never saw it coming. What an outcome! How will Europe get out of it? Hmmm, that's a good question. I'm sure if someone ever invents a plausible answer it will be reported by BBC. In the meantime people live with the consequences of what they did. Seems there's a shift taking place in the world's wealth...out of Europe.

  • rate this

    Comment number 290.


    Do you believe Sul. and myself are getting tired of our replies to you being ´referred´?

    -- If you can´t stand the heat ...........!

    --use logic instead of primitive prejudices.

  • rate this

    Comment number 289.

    282/283 MH

    Investors, gov, and individuals, yes, ratings agencies too, that want to deal internationally have to think globally, they don't have any choice.

    That those who sell and buy corp. or gov. bonds, including in Europe, use information provided by ratings agencies suggests your view is wrong.

    2008 caught a lot of people flat-footed. That doesn't make it sinister.

  • rate this

    Comment number 288.

    Re #285.

    No DurstigerMann, they have not.

    That category was refered even by Germans itself as' Volkswagen Deutche' i.e. people who took advantage of the W. German revisionists' laws simply to escape from the communist Gulag.

    And going back to you grandpa. There were hundreds of thousands of genuine Germans escaping from Poland at the end of WWII:

    whole Wermacht divisions of them.


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