Spain’s borrowing costs continued to lurch higher and share prices tumbled on the Madrid stock exchange this week as investors become more convinced the banking crisis there will mean the country needing an international bailout.
For the financial markets, the numbers tell the story.
The spread – that is the difference – between what Spain has to pay in interest on its debt and what Germany pays has reached 539 points. When Greece, Ireland and Portugal’s spreads hit 500 or higher, they needed EU/IMF bailouts.
A big part of the problem is Bankia, Spain’s fourth biggest bank, awash with soured property loans and needing nearly 24 billion euros from the government to keep it from collapsing.
Economy Minister Luis de Guindos has said Spain would borrow money from private investors to rescue Bankia but that plan looks untenable given the very high rate of interest it would have to pay.
Adding to market nervousness, Spain’s central bank governor, Miguel Angel Fernandez Ordonez has stepped down early after government officials blamed him for the rising cost of bailing out the banks.
He like – the politicians and the bankers – denied he was at fault.
Spain’s Bankia, steps in the wrong direction
euronews spoke to Josep Maria Ureta, an economic specialist at the newspaper ‘Periodico de Catalunya’, about Spain’s banking crisis and debt.
Vicenç Batalla, euronews: We now know that the European Central Bank (ECB) has rejected the Spanish government’s plan to rescue Bankia by swapping sovereign debt. At the same time, the country’s cost of borrowing is exploding. What is the alternative for Prime Minister Rajoy?
Josep Maria Ureta: The alternatives are very clear. He could choose between debt and deficit. He just didn’t want the deficit to rise because it’s very hard to respect the commitment he gave Brussels. Given that he’s been refused the debt option, which was to tack the recapitalisation cost for Bankia at the ECB onto the refinancing mechanism, he has to inject public money from Spain’s budget.
If we’re looking at 23 billion euros, the Spanish public deficit could jump two percentage points. We also learned yesterday that in just four months we have already eaten into 70 percent of the Spanish deficit possibilities.
euronews: What errors did Bankia commit? What responsibility can be assigned to the governments of Zapatero and Rajoy, or to Bankia’s former president, Rodrigo Rato, or Bank of Spain Governor Miguel Ángel Fernández Ordóñez?
Ureta: Remember that Bankia is less that one year old. It was a grouping together of several Spanish savings banks closely linked to regions that were the most deeply involved in property development, therefore the bubble, like the Valencia and Madrid regions. Their solution was to group together. But when you put a bunch of bad banks together, all you get is a bad bank, never a good bank.
Once they had done this, they came out on the stock exchange, and they passed all the procedural checks to do this, like the national market values commission which monitors the process, which means the Bank of Spain.
The politicians’ responsibilities are shared: some of them lie with the previous socialist government, because Rodriguez Zapatero was aware of the whole process, and others lie with the conservative Partido Popular, because the big regions that took part in creating Bankia were under conservative regional governments, and so they controlled the savings banks.
The Bank of Spain’s responsibility is one of supervisor. It knew where the Spanish financial bubble was; it knew the link between the savings banks and the property sector. They tried fusion as a solution at first, and when that didn’t work, the introduction onto the stock market made the problem worse, instead of resolving it.
euronews: What is the European Union’s rescue role? Is the European Financial Stability Facility (EFSF) ready for a country of Spain’s size?
Ureta: Of all the steps Spain has taken since last summer we should remember the letter sent to the Spanish and Italian governments by the head of the ECB Jean-Claude Trichet, on 5 August 2011, to Silvio Berlusconi and José Luis Rodríguez Zapatero, neither of whom is in power now.
This letter was signed by the governor of the Bank of Italy Mario Draghi and Miguel Ángel Fernández Ordóñez, who just quit yesterday. One month before he was fired, this letter told the Spanish government what measures to take to get European help. This would not have been so clear if we had not known that the EFSF was activating on 1 July, and it is very probable that Spain will have to go asking it for help.
Either Spain decides to do that itself, even if it doesn’t want to, or the European authorities will suggest that it ask. This muscling down will mean around a month and a half of difficulty and tension on the markets.