Bank bailout beckons!
IT has been another week of uncertainty for the Spanish economy as the country teeters on the brink of an embarrassing financial bailout.
Prime Minister Mariano Rajoy has spent the entire week trying to restore confidence inSpain’s financial sector as every day brought more and more depressing news.
Yesterday (Thursday), a mini-bailout was averted as the latest bond scheme proved to more popular than expected.
The medium-to long-term bonds were treble subscribed, but the Spanish Government were still forced to issue them at a much higher rate than for the last bond sale.
The Treasury sold 638m euros of two-year bonds at a yield of 4.335%, and 825m euros of four-year bonds at 5.353%, in addition to the 611m euros of benchmark, 10-year bonds.
This is great news as this forced the yield on Spanish 10-year bonds from previous auctions to around 6.1% in trading, just days after having touched 6.7%.
The watermark is seen as 7%, which will trigger an EU bailout. It was at this figure thatIreland,PortugalandGreeceneeded to get out the begging bowl.
Rajoy was bullish on the news, saying: “I hope this sends a message of calm to everyone.”
George Osborne, theUKChancellor, said: “I know they are working very hard on an imminent resolution. I am optimistic that people are working hard on a solution, and a solution, I think, is coming.”
But not everyone was celebrating. The issue was seen as a small success, but some experts are still warning caution.
“Spainhas issued these at prohibitive rates, which underscore the dramatic deterioration inSpain’s perceived creditworthiness,” said Nicholas Spiro, of Spiro Sovereign Strategy. “If it were not for its banks’ continued support at auctions,Spainwould be unable to sell its debt.”
Yesterday’s news does give Spain a brief breathing space. This coming Monday, the IMF (International Monetary Fund) will release a long-awaited report into Spanish banks.
It is understood this will say that they need an extra 35-80bn euros of working capital. This is on top of the rising 85bn-euro debt the country already needs to raise and serve before the end of the year.
The Spanish government will not act until this is published, but it seems inevitable that they will ask for help next week. It is believed that Rajoy will ask for a bailout for its banks, rather than a loan for the whole of the country. While this is politically smart, it is also dangerous.
There is no doubt that the EU will ratify a bailout, but will they be so keen to issue a second one in a month’s time? There are already rumours of the state running out of cash for July’s bills.
Would it not be safer forSpainto get one large bailout, with a lower interest rate, rather than trying to save face and reach for another humiliating loan in the late summer months?
Another major problem for Rajoy is the terms of any bailout. European leaders will want a reform to the waySpaindoes business, and this was issue was discussed at length by David Cameron and German Chancellor Angela Merkel this week.
Talks were described as “positive” and it seems they found some common ground, with Merkel saying: “We need not just a currency union; we also need a so-called fiscal union with more common budget policies.”
“We need, above all, a political union. That means that we must, step by step as things go forward, give up powers toEurope.”
These are not comforting words for Rajoy. He favours, and won, the recent election on this, and plans to drive Spanish politics away from the EU and back into the hands of Spaniards.
David Cameron was just as sharp, saying: “While not one leader could be singled out for responsibility, a whole series of measures both short and longer term, were needed.
“We’ve always said there’s some urgent action needed to stabilise markets, which is about building firewalls, recapitalising banks.
“There’s also important, ongoing action to make sure we have plans, credible plans, to deal with debt and deficit.
“But also, there is the need for structural reform to get growth back inEurope, and we support those structural reform plans.”
While there are universal calls for the entire banking system to be shaken up, day-to-day customers and savers shouldn’t panic.
The planned measures will safeguard accounts and help banks trade out of their woes in a similar way to that of British banks.
Rajoy is keen to make the bailout a banking issue, rather than a national one, but since the Government is underwriting customers’ accounts, it is essentially the same thing.
Meanwhile King Juan Carlos spoke out regarding the nation’s economic woes, while on a visit toChile.
He said that, whileEuropeneeds austerity and discipline, it won’t be enough without solidarity.
The King added that lack of solidarity was clear, warning that investors were abandoning the 27-nation EU because they doubted the desire existed to stay together and defend the common currency.
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