NEWS, 11.06.2012.

Spain's 'shortsighted crisis management' - Swedish PM

 

Financial market euphoria over an EU bailout for Spain's troubled banks faded today as investors sounded the alarm over its impact on public debt and worried whether Greek elections will deepen the euro zone crisis.Madrid insisted it would stick to its borrowing plans this year after the European Union agreed to the bailout of up to 100 billion euros ($125 billion), which is aimed at rescuing banks battered by a property market collapse and recession rather than helping the Spanish state finance its budget deficit.But yields on Spanish government debt rose as Sunday's deal failed to calm concerns that Madrid may end up locked out of funding markets like the three other euro zone countries already forced into bailouts - Greece, Ireland and Portugal.With this weekend's Greek elections overshadowing that country's future in the euro zone, EU officials said they had discussed limiting the size of withdrawals from cash machines, imposing border checks and introducing capital controls as a worst-case scenario should Athens leave the bloc.Underlining how problems in one euro state can rapidly spread to others, Cyprus strongly hinted today it may become the fifth member of the bloc to apply for an international bailout before the end of this month to help its banks, which are heavily exposed to Greece."Short-sighted" Swedish Prime Minister Fredrik Reinfeldt, whose country remains outside the euro zone, said Europe was still not doing enough to tackle the fundamental causes of its economic stress."Spain and many other countries have a lot of reforms they need to do to become competitive, to get order in public finances, to recapitalise and get a sound banking sector, and if they don't do this, you can never solve it through shortsighted crisis management,".The European Commission's top economic official, Olli Rehn, told that the pre-emptive action to support Spain "is critical for calming down market turbulence in Europe and (ensuring) the proper functioning of the financial system in Spain".However, European stocks ended flat after leaping to a four-week high earlier in the day, while yields on the bonds of fellow euro zone struggler Italy rose sharply with Spain's."The bailout for Spain is a good short-term fix, not a long-term solution," Nicola Marinelli, portfolio manager at Glendevon King, said. "In this environment of short-term plasters, there are going to be periods of rallies and panic."An early rally in Spanish debt petered out, and 10-year bond yields ended the day 25 basis points higher at 6.5 percent - on course for their worst day since early April and within 30 basis points of euro-era highs.The Spanish Treasury said it would continue with regular debt auctions after Saturday's deal. While bailout funds should cover the cost of rescuing the banks, Madrid still has 37 billion euros to raise this year for its budget."Accepting aid for recapitalisation of the banking sector means it will have to finance itself on capital markets for its deficit and it's getting harder with yields climbing," said Viola Julien, a strategist at Helaba Landesbank Hesse-Thueringen.Fitch Ratings cut the long-term credit ratings for Spain's two biggest banks, Banco Santander and Banco Bilbao Vizcaya Argentaria to BBB-plus from A. However, neither is expected to take bailout funds which will go instead to weaker institutions, and Monday's announcement was a technical move following Fitch's three-notch cut Spain's sovereign rating last week.Bondholders are worried that the rescue will weigh on Spain's fast-rising public debt. They also fear that if the euro zone's future permanent bailout fund, the European Stability Mechanism, is used for the rescue, they will be subordinate to official creditors and face losses in any debt restructuring.However, a senior euro zone official said the euro zone's temporary EFSF bailout fund could be used to allay these worries.Supervision Greece's general election next Sunday, the second in as many months, could further sour markets if radical leftists hostile to the austerity terms of the country'sEU/IMF bailout outperform the mainstream conservative and centre-left parties that signed the deal, or the vote ends in another deadlock.European finance officials have held a series of conference calls in recent weeks on contingency plans should Greece leave the euro, officials said. However, they emphasised this was merely about being prepared for any eventuality rather than planning for something they expect to happen."It is sensible planning, that is all, planning for the worst-case scenario," one source said.The Bank of Greece said it was not aware of any plans such as for capital controls in the euro zone.Spanish Prime Minister Rajoy said on Sunday Madrid had scored a victory by securing aid from euro zone partners without having to submit to a full state rescue programme, saying Spain's rescue had "nothing to do" with the procedures imposed on Greece, Ireland and Portugal.But EU Competition Commissioner Joaquin Almunia and German Finance Minister Wolfgang Schaeuble said that as in those other bailouts, a "troika" of officials from the International Monetary Fund, the European Commission and the European Central Bank would oversee the financial assistance."Of course there will be conditions," Almunia told Spain's Cadena Ser radio. "Whoever gives money never gives it away for free."Schaeuble told Deutschlandfunk radio: "The Spanish state is taking the loans, Spain will be responsible for them ... There will likewise be a troika. There will of course be supervision to ensure that the programme is being complied with, but this refers only to the restructuring of the banks."Under surveillance Spanish state finances are already under European Commission surveillance under the EU's excessive deficit procedure.The bank rescue package will add up to 10 percentage points to Spain's debt-to-gross-domestic-product level, taking it close to 90 percent, while the country faces a grinding recession, with nearly one worker in four unemployed.Some economists believe Spain will eventually need a full state bailout, and that Italy may be next in line because of a similar combination of high debt and no economic growth, despite reforms initiated by Prime Minister Mario Monti.Italian Industry Minister Corrado Passera dismissed the idea that Rome might need external help at some point."Italy has done what was necessary to save itself in past months," Passera, a former banker, told reporters in Milan, saying austerity measures taken so far had positioned Italy as "among countries better placed to deal with the financial turmoil Europe finds itself in".China, to which Europe has looked largely unsuccessfully for financial support, said on Monday that the euro zone deal for Spain was a useful short-term fix, but urged the bloc to take more decisive action to safeguard longer term stability."This can be of great use in controlling short-term risk," Vice Finance Minister Zhu Ghuangyao told a news conference. "But, in the interests of mid- or long-term stability, we hope the euro zone will improve consensus and take more decisive action."The Chinese critique of Europe's slow-moving steps mirrored comments by US officials worried that the euro zone debt crisis is hurting world economic recovery and President Barack Obama's prospects of re-election in November.US Treasury Secretary Timothy Geithner welcomed the euro zone support for the recapitalisation of Spanish banks as "concrete steps on the path to financial union, which is vital to the resilience of the euro area".European Union leaders will discuss longer-term plans for deeper euro zone fiscal and banking union at a summit on June 28-29, as well as measures to revive growth. The more ambitious reforms would require treaty change that would take months, if not years, to approve and implement.

Spanish banks queue up to tap European rescue funds

 

Seven former savings banks in Spain, already patched up with state aid, will be first in line to tap European rescue funds requested by the country, though the queue for financing could grow to include all but the very biggest banks.Spain's banks lent heavily to real estate developers during a decade-long property boom which ended in 2008, leaving creditors with bad loans to housebuilders, unfinished apartment complexes and brownfield sites.The euro zone's fourth largest economy is unable to raise funds on the international markets to cover these losses at reasonable prices and had to ask on Saturday for up to 100 billion euros ($125 billion) from the euro zone to shore up its financial system.The International Monetary Fund said in a report on Friday that the most troubled former savings banks, accounting for around 22 percent of the country's financial system, faced the biggest challenge due to their high real estate exposure.The IMF did not name the entities, but seven savings banks have received state help to cope with losses and absorb mergers. Spain now has around 10 savings banks, less than a quarter of their number two years ago after the government forced a programme of consolidation.The seven banks are Catalunya Caixa; Unnim - now part of BBVA ; Espana-Duero - merged with Unicaja; NovaCaixaGalicia; Bankia ; Banco Mare Nostrum; and Banca Civica - which belongs to CaixaBank.Of those, the most problematic are fourth-biggest lender Bankia, nationalised in a 23.5 billion euro ($29.3 billion)rescue last month, and the two former savings banks struggling with capital shortfalls - mid-sized NovaCaixaGalicia and CatalunyaCaixa.Both these banks were created by combining savings banks in autonomous regions - Galicia and Catalonia - partly to placate local politicians. The state took them over last year when it became clear they could not handle their losses.These two lenders require around 9 billion euros to cover the latest government demands for capital to cushion against real estate loan defaults, the Bank of Spain told a closed-door parliamentary committee hearing, according to a political source present at the briefing.Small listed lender Banco de Valencia is another potential black spot. It was also taken over by the government with an intent to auction it off with guarantees against future losses.The lender is based in the region of Valencia, home to savings bank CAM which was called the 'worst of the worst' by a former central bank governor after losses began to soar when exposure to real estate at the bank was properly recognised.Along with its fellow Valencian lenders - CAM and Bancaja, which ended up as part of Bankia - Banco de Valencia lent unsustainably to property developers who threw up block after block of holiday apartments along Spain's Mediterranean coast.Grandiose projects The savings banks or cajas were originally set up to provide loans to people suffering in the aftermath of the Peninsular War with Napoleonic France in the early nineteenth century. Often founded by the Roman Catholic Church, they aimed to give farmers loans at reasonable interest rates during times of poor harvest.However, having a savings bank in fiercely regional Spain became a sign of autonomy. Many got hijacked by local governments who put politicians on their boards and hived off funds to pay for grandiose construction projects.Nowhere was this more evident than in the eastern region of Valencia, where the cajas bankrolled huge loss-making projects aimed at increasing the status of the region such as art centres, film studios and airports.Reports that former directors at NovaCaixaGalicia and Alicante-based CAM had awarded themselves handsome severance pay packages after they were taken over by the state provoked public outrage last year.Now Spain could even be considering folding all its rescued banks into one nationalised bank if planned auctions were not successful, a senior Economy Ministry source has said.Some mergers and sales are still happening. Former savings banks Ibercaja and Caja 3 are beginning a three-way merger with Liberbank. Together they hold toxic real estate assets of around 11.8 billion euros, around a quarter of the amount held by Bankia and parent company BFA.Beyond real estate woes There are also concerns about the mid-sized and small listed lenders, with the IMF saying these entities could record losses in 2012 due to increased provisioning requirements against performing real estate loans.Citi forecasts 2012 losses for Popular, CaixaBank and Banesto as a result of the extra provisioning.Popular has high exposure to real estate loans. It said on Wednesday it would set aside more capital to cover potential losses beyond real estate, on mortgages and loans to businesses - something other banks may have to contend with too after an independent audit of the sector is completed this summer.A recession in Spain threatens to deepen the problems for the troubled lenders."Unless the government maintains its current spending, incomes in Spain will fall and the sustainability of the private sector debts will be undermined," said analysts at CreditSights, pointing out that at the same time Spain was trying to cut its big budget deficit.Standard &Poor's downgraded mid-sized bank Sabadell , buyer of CAM, to junk status in April.