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Spain urges EU to bail out its banks

by Paul Whitfield | Published June 5, 2012 at 10:27 AM

The European Union should provide funds to bail out Spain's banks, a senior Spanish minister suggested for the first time, as the chairman of the nation's largest lender projected that about €40 billion ($50 billion) will be needed to stabilize Spain's battered banking sector.

"It's so important that the European institutions open up and help us," Budget Minister Cristobal Montoro told Spanish radio on Tuesday, June 4. Montoro said that the sums needed were not "astronomical," but did not put a figure on them.

In the interview he also highlighted the punishing yields on Spanish sovereign debt, currently around 6.3% for 10-year bonds vs a 1.2% yield on German debt. "What that premium says is that Spain doesn't have the market's door open, as such. The challenge is to open that door," Montoro said.

The call for EU funds is a further-sign that Spain's banking woes continue to threaten euro zone stability and growth even as Greece prepares for polls that could decide whether it retains the euro and if the euro survives at all.

Those fears have prompted the Group of Seven leading industrialized nations to arrange an emergency conference call to wrestle with Spain's ongoing banking crisis and the apparent growing strains on the euro zone. Ministers and central bankers from the U.S., Canada, Japan, Britain, Germany, France and Italy will on Tuesday discusss the EU's policy response, Canada's finance minister Jim Flaherty told reporters late Monday.

"The real concern right now is Europe of course," he said. "The weakness in some of the banks in Europe, the fact they're undercapitalized, the fact the other European countries in the euro zone have not taken sufficient action yet to address those issues of undercapitalization."

Germany will likely face pressure to back the creation of a new banking union, pooling of European government debt and the issuance so-called eurobonds that will reduce the cost of borrowing by embattled nations like Spain. An EC proposal last week called for a system under which at least the 17 nations that use the euro would have mutually insured banking deposits.

But German President Angela Merkel has opposed such a banking union and eurobonds before EU member nations create a closer fiscal and budgetary union, reducing individual nation's abilities to dictate their own state spending.

"You can't demand Eurobonds but not be prepared for the next step in European integration," German Chancellor Angela Merkel told her Christian Democrats party's conference in Berlin over the weekend.

Spain is backing both proposals, while France and Italy are behind the idea of pooling European debt but against a closer budgetary union.

The European Commission last week called for greater euro wide coordination to alleviate pressure on individual nations. "To sever the links between banks and the sovereigns, direct recapitalization by the [European Stability Mechanism, the EU's bailout vehicle] might be envisaged," the European Union's executive branch said in a statement published on May 30.

The Spanish government had earlier this year insisted that its banks need no external help to avoid collapse. Prime Minister Mariano Rajoy said his government would not intervene to save a bank, before he last month authorized a bail out of Spain's No.4 lender Bankia SA that is expected to cost about €19 billion. Spanish lenders will need an additional €40 billion in new funds to meet capital adequacy requirements, Emilio Botin, chairman of Spain's largest lender Banco Santander SA, told reporters on Monday.

Rajoy continues to insist that Spain doesn't need EU support but has matched that with calls for the European Stability Mechanism to be given the freedom to directly recapitalized struggling lenders. Currently the bailout vehicle does not have the authority to directly inject capital into banks.

Spain's banking sector has suffered from massive write-downs on loans to property developers that were made during a real estate bubble that collapsed in 2008. Spanish lenders have an estimated €148 billion of underperforming loans, equal to about 8.36% of their total loans, the Bank of Spain said in a report published May 18.

Spain's government has twice increased the amount of reserves that Spanish banks have to hold to cover their property loans, forcing lenders to find a total €80 billion of capital to meet the new rules.

Other nations might also welcome the opportunity to borrow money through a cheaper European mechanism as they seek to support their own lenders. Portugal on Monday announced that it will inject €6.65 billion ($8.27 billion) into three of its largest lenders. state-controlled bank Caixa Geral de Depositos will received €1.65 billion, Banco Comercial Portugues SA will get as much as €3.5 billion and Banco BPI SA will get €1.5 billion.

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