Brussels, 22/06/2012 (Agence Europe) - The formal request from Spain for financial aid to bail out Spanish banks suffering from the bursting of the property bubble is imminent, explained the Spanish finance minister, Luis de Guindos, in Luxembourg on Friday. The previous day two independent consultancy reports had assessed Spanish banks' capital requirements at no more than €62 billion (see EUROPE 10638). The head of the Eurogroup, Jean-Claude Juncker, said on Thursday that Spain would lodge the request by Monday, but the French finance minister, Pierre Moscovici, said it would be lodged on Friday.
The exact amount of aid to be provided will be decided in talks on a memorandum between Spain and its European lenders. The Eurogroup wants to be able to make the final decision at its meeting on Monday 9 July. Spain is already in talks with the European Commission. De Guindos said a roadmap had to be drawn up and the aid will initially go to financial bodies controlled by the Spanish state.
On Thursday, the Spanish government published the two reports, one by US consultancy Oliver Wyman and another by German consultancy Roland Berger. If the worst case scenario were to materialise, then banks would need between €51bn and €62bn, according to Wyman, or €52bn according to Berger. The cash would not necessarily have to come from taxpayers alone because it is hoped that some of it can be raised on the financial markets. Of the 14 Spanish banks whose accounts have been examined with a fine toothcomb, the most vulnerable banks are the ones already nationalised or due to be nationalised shortly, namely Bankia, CatalunyaCaixa, Novacaixagalicia and Banco de Valencia.
Conditions attached. Once the official request is made, the European Commission will send fact-finders to Spain (next week) to negotiate the memorandum with the ECB and the European Banking Authority, explained Olli Rehn. It will include conditions like restructuring the most vulnerable banks and tightening up bank supervision rules. Rehn said Spanish banks would have to fund the real economy by providing loans to households and companies rather than speculating their money away. The IMF will not provide any cash as such, but will be providing expert advice.
EFSF or ESM? The financial aid will be channelled through the European Stability Mechanism (ESM), the eurozone's permanent bailout fund that has lending capacity of €500 billion - but only if the fund is set up on time. If there are delays in setting up the ESM, the EFSF (European Financial Stability Facility) will provide the cash in the meantime and the ESM will take over later. For aid from the ESM, institutional lenders will take priority over other holders of Spanish bonds, but not for cash from the EFSF. Juncker played down the importance of this question and the EFSF director, Klaus Regling, said that the maximum amount agreed to by the Eurogroup, €100bn, is only 10% of Spanish GDP. The EFSF can provide cash very fast through EFSF bonds rather than direct borrowing. The Eurogroup hopes the ESM will be up and running on Monday 9 July.
Breaking the connection between bank crises and sovereign debt. Wherever it comes from, the aid for Spanish banks will be channelled through state coffers, which will be held responsible for bailing out Spanish banks, explain the intergovernmental treaties establishing the EFSF and ESM. The aid will therefore add to Spanish debt, despite the Spanish government's fight to get the rules changed so it can go direct to banks. De Guindos said on Friday, however, that this direct payment option was still on the cards at the Eurogroup. Spain is backed by France and the European Commission on this. On Thursday, the Irish finance minister, Michael Noonan, said the European authorities had to learn lessons from Ireland - namely that bailing out banks while running the cash through the government's books only increases the burden. The IMF director general, Christine Lagarde, called for stronger economic and monetary union and urged the eurozone to take measures to break the connection between sovereign debt and struggling banks by ensuring that bank bailouts are not channelled through the state - comments welcomed by Juncker and Rehn. (MB/transl.fl)