Business World

Saturday 21 April 2018

Spanish bailout request to go ahead within days

Rescue negotiations to begin on Monday as IMF calls for direct recapitalisation of Europe's banks

Peter Flanagan in Luxembourg

SPAIN will formally request a bailout for its banks on Monday, as the International Monetary Fund (IMF) called for direct recapitalisation of Europe's banks and much deeper European integration

The head of the Eurogroup of eurozone finance ministers, Jean Claude Juncker, said negotiations on the memorandum of understanding for the bailout will begin next week with ministers expected to approve the loans on July 9.

Spain's loans will come from the current bailout fund, the European Financial Stability Facility (EFSF) and then be replaced by the European Stability Mechanism (ESM) when it is finally up and running next month.

Stress

Mr Juncker did not confirm precisely how much capital would need to go to Spain, but suggested the final figure will be guided by the results of two stress tests on the country's banks, which yesterday showed lenders would need between €51bn and €62bn under a worst-case scenario.

The request for aid comes as the yield on the country's debt soared to unaffordable levels, with the interest rate on the benchmark 10-year bond topping a record 7.29pc.

Unlike the previous rescues of Ireland, Greece and Portugal, the capital injection for Spain is still focused on the country's banks and not the state itself.

Under the current conditions of the ESM, that fund will have "preferred creditor" status, meaning the ESM will be repaid before regular senior bondholders.

The announcement of the bailout came as the IMF outlined ambitious plans for much deeper integration of the eurozone, including a common European debt security and direct recapitalisation of Europe's banks without going through the sovereigns -- measures that are vigorously opposed by Germany.

The fund's head, Christine Lagarde, said the euro area crisis had reached a "critical stage" and a "determined and forceful move" was needed toward deeper European union.

The IMF's "Article 4 Consultation" outlines three long-term aims of fiscal union, banking union and structural reform to improve competiveness across the zone.

To do this, the paper calls for several measures, including a form of euro bond, an easier monetary policy from the ECB, and direct recapitalisation of the continent's banks. The Irish Government has repeatedly called for such a measure to remove the burden of Ireland's bank recapitalisation from the state balance sheet.

Irish Independent

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