Monday 23 October 2017

Merkel comments suggest Spain may soon look for bank help

Carlos Ruano and Andreas Rinke

CHANCELLOR Angela Merkel underlined Germany's readiness to use all instruments to maintain stability in the euro zone on Thursday, fuelling expectations that Spain may soon decide to seek help for its banks beset by bad debts.



Speaking after talks with British Prime Minister David Cameron - who called for "urgent action" to tackle the debt crisis - Merkel said Germany stood ready, alongside the other 16 countries in the euro zone, to do whatever was necessary.

"It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary," she said, referring to the euro zone's temporary bailout fund, the EFSF, and to its permanent successor, the ESM.

"That is a clear expression of our political will to keep the euro zone stable, so that the eurozone can make its contribution to global economic growth."

If Spain does decide in the coming days or weeks to seek help with recapitalising its banks, laden with bad property debts and other underperforming loans, it is expected to ask for funds from the 440 billion euro EFSF, or potentially from the ESM, which is scheduled to start operating next month.

A report by the International Monetary Fund, scheduled for release on Monday, is expected to show that Spain needs at least €40bn to recapitalise its weakest banks, sources in the country's financial sector told Reuters.

Despite the pressure on its banks, Spain managed to weather funding pressures in credit markets, raising all the money it required, although at a higher cost. Madrid sold €2.1bn of government bonds, paying just over 6pr for 10-year debt - up from 5.74pc last month and the highest yield at an auction since 1998.

The sale laid to rest - at least for now - fears raised by Treasury Minister Cristobal Montoro on Tuesday that Spain was being shut out of credit markets.

Despite a rally in stocks, bonds and the euro owing partly to expectations of action by central banks to revive economic growth, the euro zone remains under pressure to act quickly and decisively to resolve its debt problems.

"Talk of a rescue for Spanish banks is the thing that is reducing risk aversion in the markets," said Alessandro Giansanti, a bond strategist with ING bank, who added that such talk had improved the environment for Spanish bonds.

France, the euro zone's number two economy after Germany, continued to benefit from its safe-haven status, selling €7.84bn of bonds at record low yields despite announcing a partial reversal of the previous government's pension reform on Wednesday that runs counter to EU policies.

OUTSIDE PRESSURE

U.S. President Barack Obama and Canadian and Japanese leaders telephoned Europe's main leaders this week to express concern at the worsening crisis and press for stronger action - raising hopes before an EU summit on June 28-29.

But Merkel earlier doused expectations that the summit will produce a breakthrough, saying progress towards a fiscal and banking union would take substantially longer.

In a television interview broadcast on Thursday, she said the euro zone was moving inevitably towards a political union requiring nations to cede more sovereignty, and that would lead to more of a two-speed Europe, with non-euro states in the slow lane.

"I don't believe that there will be one single summit that will decide on a big bang," Merkel told ARD. "But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe."

"Whoever is in a currency union will have to move closer together. We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us," she said.

Most EU officials see the process of integration taking five to 10 years at best, much longer than the view of the markets, although economists also argue that agreeing steps towards closer union will itself help boost market sentiment.

RIFT WITH BRITAIN

As the EU's biggest economy and largest contributor, Germanyholds the key to how the bloc comes to Spain's rescue, and whether Europe is able to agree on a banking union with a joint deposit guarantee and a bank resolution fund, as envisaged by the European Central Bank and the European Commission.

Merkel's remarks underscored a growing rift with non-euro member Britain, a longstanding brake on European integration, which said bluntly on Thursday that it would not take any part in a euro zone banking union.

Britain’s Chancellor of the Exchequer George Osborne told BBC radio: "There is no way that Britain is going to be part of any euro zone banking union.

"I think Britain will require certain safeguards if there is a full-blown banking union."

His comments, later reiterated more softly by Cameron in Berlin, highlight the potential complexity of EU negotiations on the issue, since London is the euro zone's main financial centre and could veto deeper banking integration.

Osborne urged the euro zone to use its bailout fund to recapitalise Spain's troubled banks, which are reeling from the bursting of a property bubble and aggravated by recession.

Spain says it is awaiting the outcome of the IMF report and an independent audit of its banks' capital needs before deciding on any recourse to Europe to help recapitalise them.

The IMF report goes before the global lender's board on Friday, raising expectations that EU and Spanish officials may have the outlines of a possible rescue plan worked out for when the numbers are released.

One senior EU official indicated that Spain could take a "minimalist" approach to recapitalisation, requiring €30bn to €40bn for four or five weaker institutions, or else a "maximalist" line which might need as much as €100bn.

"Politicians tend to prefer doing the least that's required, so in the case of Spain, it seems likely that a minimalist approach will be taken," the official said.

Spain has so far made no application for European aid, and officials say it is determined to avoid the kind of humiliating policy conditions and intrusive quarterly EU/IMF inspections imposed on Greece, Ireland and Portugal.

While a rescue loan may be presented for political reasons as going to Spain's FROB bank resolution fund, legally European bodies can lend only to the state, EU officials say. That raises the question of what policy conditions and monitoring would be attached to any assistance.

Under the rules of the EFSF, so far used to bail out Irelandand Portugal, countries can receive aid for their banks without having to submit to the same strict 'conditionality' as under a full bailout programme, but it remains unclear whether Spainwould accept that and whether it can meet all the requirements.

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