Spain rescue may bring brief respite
PARIS
- Euro zone finance ministers have rushed Spain into an EU-funded
rescue for its debt-stricken banks to pre-empt the threat of a bank run
if Greece's debt crisis flares again but any respite for Madrid and the
euro may be short-lived
MADRID/BERLIN |
(Reuters) - Financial market euphoria over a European bailout for
Spain's debt-stricken banks faded quickly on Monday as investors sounded
the alarm over its impact on public debt and bondholders, and eyed the
next risks in the euro zone's debt crisis.
EU and German officials said
Spain faces supervision by international lenders after the deal to lend
Madrid up to 100 billion euros ($125 billion), contradicting Prime
Minister Mariano Rajoy who insisted the cash came without such strings.
European
stocks leapt to a four-week high, with investors scooping up battered
financial shares. But Spanish and Italian bond yields rose sharply as
doubts set in about the impact and terms of the deal, designed to avert a
run on Spanish banks.
Cyprus, which is deeply exposed to Greece,
strongly hinted on Monday that it may apply for an international
bailout before the end of this month, both for its banks and for the
state. It would be the fifth member of the 17-nation euro area to
require assistance since the debt crisis erupted in Greece in late 2009.
The
European Commission's top economic official, Olli Rehn, told Reuters in
an interview that the pre-emptive action to support Spain "is critical
for calming down market turbulence in Europe and (ensuring) the proper
functioning of the financial system in Spain".
Bondholders
are worried that the rescue will weigh on Spain's fast-rising public
debt. They also fear that if the euro zone's future permanent bailout
fund, the European Stability Mechanism, is used for the rescue, they
will be subordinate to official creditors and face losses in any debt
restructuring.
"The EU is selling
this as a 'great victory', but when you look at the details, this is a
loan, and we don't know yet where the money will be coming from. At the
end of the day, it will increase Spain's debt-to-GDP ratio no matter
what they say," said Steen Jakobsen, chief economist at Saxo Bank in
Copenhagen. <MKTS /GLOB}
Previous
"bailout bounces" have been short-lived, often fizzling within a day or
two as investors anticipate the next flare-up in the euro zone's
unresolved debt crisis.
Greece's
general election next Sunday could rapidly sour market sentiment if
radical leftists hostile to the austerity terms of Athens' EU/IMF
bailout outpoll the mainstream conservative and center-left parties that
signed the deal, or the vote ends in another deadlock.
Rajoy
said on Sunday Madrid had scored a victory by securing aid from euro
zone partners without having to submit to a full state rescue program,
saying Spain's rescue had "nothing to do" with the procedures imposed on
Greece, Ireland and Portugal.
But
EU Competition Commissioner Joaquin Almunia and German Finance Minister
Wolfgang Schaeuble said that as in those other bailouts, a "troika" of
the International Monetary Fund, the European Commission and the
European Central Bank would oversee the financial assistance.
"Of course there will be conditions," Almunia told Spain's Cadena Ser radio. "Whoever gives money never gives it away for free.
The
IMF would be fully involved in monitoring Spain's program even though
it was not contributing funds, and banks that received aid must present a
restructuring plan, he said.
Schaeuble
told Deutschlandfunk radio: "The Spanish state is taking the loans,
Spain will be responsible for them... There will likewise be a troika.
There will of course be supervision to ensure that the program is being
complied with, but this refers only to the restructuring of the banks."
UNDER SURVEILLANCE
Spanish state finances are already under European Commission surveillance under the EU's excessive deficit procedure.
Dutch
Finance Minister Jan Kees de Jager said in a letter to parliament that
the loans would add to Spain's public debt, and he had insisted on full
IMF involvement.
"It was essential
for the Netherlands that the IMF will be involved in the whole process:
reviewing the formal support request, determining the conditions, and
monitoring progress," he wrote.
The
Spanish government said it would stick to this year's borrowing program
on financial markets. Spain still needs to refinance 82.5 billion euros
of debt maturing by the end of the year, with a big hump at the end of
October, and the autonomous regions have a further 15.7 billion euros of
debt maturing in the second half of 2012. The central government and
the regions also have to fund a deficit of about 52 billion euros this
year.
The bank rescue package will
add up to 10 percentage points to Spain's debt-to-gross-domestic-product
level, taking it close to 90 percent, while the country faces a
grinding recession, with nearly one worker in four unemployed.
Some economists believe Spain will eventually need a full state bailout, and that Italy
may be next in line because of a similar combination of high debt and
no economic growth, despite reforms initiated by Prime Minister Mario
Monti.
Italian Industry Minister Corrado Passera dismissed the idea that Rome might need external help at some point.
"Italy
has done what was necessary to save itself in past months," Passera, a
former banker, told reporters in Milan, saying austerity measures taken
so far had positioned Italy as "among countries better placed to deal
with the financial turmoil Europe finds itself in".
CHINA SCOLDS
China,
to which Europe has looked largely unsuccessfully for financial
support, said on Monday that the euro zone deal for Spain was a useful
short-term fix, but urged the bloc to take more decisive action to
safeguard longer term stability.
"This
can be of great use in controlling short-term risk," Vice Finance
Minister Zhu Ghuangyao told a news conference. "But, in the interests of
mid- or long-term stability, we hope the euro zone will improve consensus and take more decisive action."
The
Chinese critique of Europe's slow-moving steps mirrored comments by
U.S. officials worried that the euro zone debt crisis is hurting world
economic recovery and President Barack Obama's prospects of re-election
in November.
U.S. Treasury
Secretary Timothy Geithner welcomed the euro zone support for the
recapitalization of Spanish banks as "concrete steps on the path to
financial union, which is vital to the resilience of the euro area".
China's
People's Daily, the mouthpiece of the ruling Communist Party, scolded
Europeans for making such heavy weather of their financial problems.
"Fundamentally,
Europe is facing a problem of systemic integration and survival.
Overcoming the crisis depends on whether the debt-ridden countries can
decide on painful reforms and rouse their spirits to tackle them," said a
commentary signed "Zhong Sheng", or "Voice of China", often used to
give the paper's view on foreign policy.
European
Union leaders will discuss longer-term plans for deeper euro zone
fiscal and banking union at a summit on June 28-29, as well as measures
to revive growth. The more ambitious reforms would require treaty change
that would take months, if not years, to approve and implement.
Finnish
Prime Minister Jyrki Katainen told Reuters in an interview that the
timely rescue for Spanish banks would make it easier to limit contagion
from countries such as Greece.
"We
have managed to avoid a major crisis but the problems are still there.
Sovereign debts is still there and even though governments have done a
good job, markets haven't valued them," Katainen said.
(Additional reporting by Michele Kambas in Cyprus, Simon Jessop in London, Justyna Pawlak and
Marine Hass in Brussels, Lucy Hornby in Beijing, Fiona Ortiz in Madrid, Blaise Robinson in Paris;
Writing by Paul Taylor; Editing by Peter Graff)
