Spain scrambles to price rescue

MADRID - Agence Frence-Presse

Spain’s Economy Minister Luis de Guindos points to a journalist at a news conference at the Ministry of Economy in Madrid, De Guindos announced that Spain will ask eurozone partners to bail out its banking sector. EPA photo

After winning the eurozone’s agreement to rescue its banks, Spain must now scramble to come up with the price tag within days and if possible, before Greece’s June 17 elections.

Spain has in its hands a deal from its eurozone partners to “respond favorably” to a formal request from Madrid for loans to salvage banks exposed to a collapsed property market.

Madrid’s partners in the 17-nation eurozone agreed to extend up to 100 billion euros, providing immediate cover for the banks’ losses and a backstop as well in the hope of easing the pressure on its strained public finances. Spanish Prime Minister Mariano Rajoy said yesterday his government’s reforms averted the need for a state bailout, after the nation secured a eurozone rescue of its banks. “If we had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain,” Rajoy told a news conference.

“It is a maximum figure,” stressed Economy Minister Luis de Guindos at a news conference announcing the accord, which his government had repeatedly denied was needed.

“Very clearly, there is a safety margin,” the minister said, adding that borrowing costs would now be less than open market rates.

Leading daily El Pais said the loan would cost 3 percent a year, citing officials with knowledge of the talks. Financial markets now demand more than 6 percent for Spain’s benchmark 10-year bonds, an unsustainable level.

“The experience of previous crises and what we have learned since 2008 is that it is better to do too much than not enough,” European Commission vice president Joaquin Almunia told El Pais.

The International Monetary Fund, in a report released three days early on June 8, estimated the Spanish banks need 40 billion euros but also warned they would require 60-80 billion euros to satisfy markets.

‘Absurd amount’
“One hundred billion, that seems like an absurd amount,” said Daniel Pingarron, analyst at brokerage IG markets. “(But) I think it is the best option for Spain: we will have almost unlimited resources and in one go very quickly can resolve a problem that we have not resolved in four years.” Spain’s banking sector has been struggling since the 2008 collapse of a property bubble which it had helped stoke by providing easy loans. To fix the situation Spain has long said it can manage by itself but finally, it had to cave in and accept outside aid.

To come up with a precise request, Madrid is waiting for the results of an audit being carried out by consultants Roland Berger of Germany and Oliver Wyman of the United States.

Their report, formally due by June 21, is now expected “within days,” said the economy minister.

Spain is accelerating the pace as Europe scrambles to batten down the hatches for the eurozone’s fourth rescue, after bailouts for Greece, Ireland and Portugal failed to tame the debt crisis. The storm ahead is the Greek election, where European leaders fear a victory for parties opposed to the austerity measures agreed in return for its bailout, could lead to an exit from the eurozone.

“If Spain fixes the problem before the Greek elections, that would be better,” said Rafael Pampillon, economy professor at IE Business School in Madrid.

Furthermore, “Spain needs to have a cheque ready as soon as the figures are known,” a diplomatic source told El Pais.
 
Time is pressing for Spain, which is being bullied on the financial markets where investors have been demanding high rates of return for fresh funding.
 
“We have to see how the program is defined and then what the investors’ reaction is,” said Intermoney economist Jose Carlos Diez.