Spanish PM: No bailouts needed for banking sector

29th May 2012

Prime Minister Mariano Rajoy affixed blame for rising Spanish borrowing costs on anxiety about the future of the common currency and again ruled out seeking outside help to stimulate a  banking sector that is still feeling the pain of a property boom that has long since bust.

"There are major doubts over the euro zone and that makes the risk premium for some countries very high. That's why it would be a very good idea to deliver a clear message there's no going back for the euro," Rajoy told a news conference.

"There will not be any (European) rescue for the Spanish banking system," Rajoy added, while calling on fellow euro-zone leaders to let the EU's bailout funds recapitalize banks directly.

The yield on Spain's 10-year government bonds rose above 6.5 per cent, closer to the 7 per cent level that prompted bailouts for Greece, Portugal and Ireland, while the shares of Bankia fell by 13 per cent in its first trading session since it announced that it would need a €19bn bailout from the government.

Nicholas Spiro at Spiro Sovereign Strategy: "The Spanish crisis has reached a tipping point. Investors have lost confidence in Spain. The botched bail-out of Bankia was the trigger for the abrupt sell-off – a sell-off that threatens to turn into a rout unless bold and decisive measures are swiftly taken by eurozone policymakers to shore up the bloc's endangered sovereigns and their banks."

Banking Denial

Despite Mr. Rajoy's claim that the country's banks don't need bailing out, The Wall Street Journal insists: "Someone is going to have to recapitalize Spain's banks. With the country now again in recession, its problem real-estate loans-currently at €17.9 billion for Bankia alone-look set to get worse. Bankia itself is the newly created product of the last government's attempt to grapple with the losses in its fragmented, but politically influential, cajas. These small regional lending banks controlled most of Spain's banking market, and the idea behind Bankia was to roll them up into an entity large enough to stand on its own. Clearly that hasn't worked."

Furthermore, Fiona Maharg-Bravo of Reuters Breakingviews says Spain's bank bailout fund, the FROB, has only about 5.3 billion euros of cash left over – a fraction of the 50 to 100 billion euros that analysts estimate is needed.

"One option would be to inject capital in the form of Spanish sovereign bonds which Bankia could then exchange for cash with the European Central Bank. But that type of fudge – similar to the promissory notes that Ireland has issued to its banks – would undermine the objective of restoring confidence in the financial sector."

"Spain is still resisting asking for help from Europe. Bankia's bailout means it is running out of arguments."


More on Mindful Money:

Return of the Pre-Euro currency

Greece needs to leave the Euro this weekend

Eurozone's Possible 'Lehman Moment': What it Means for US (video)

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