A key consideration in the Spanish bank rescue is how investors will judge the Spanish government’s solvency if it is required to add 100 billion euros of debt guarantees to its already strapped finances.
Nor is it yet known just how much money will be needed, though the answer to that question should be clearer on June 21, when the government receives the results of analyses being conducted by two consulting firms.
Another open question is whether the funds will come from the European Stability Mechanism, the permanent bailout fund that is supposed to come on line in July, or the European Financial Stability Facility, the existing bailout fund. If the E.F.S.F. is the vehicle, Finland has demanded that Spain offer collateral.
That is not an issue with the E.S.M., assuming it begins operations as planned, because the loans it offers are senior to other debt. The Spanish Economy Ministry said Monday in a statement that the aid would not undermine Spain’s public debt, and would, in fact, “reinforce its overall solvency.”
The government also maintained that it would be able to continue tapping private investors for its financing needs, with the Treasury saying it would “continue to execute its funding program through its regular auction calendar.”
That could prove wishful thinking, however, as it was Spain’s shaky performance in those auctions that led the government and European officials to get serious about working out a rescue in the first place. Investors and officials will be carefully watching Spain’s bond yields over the coming week.
Gilles Moëc, an economist at Deutsche Bank in London, wrote in a note that the fate of the bailout would depend on the ability of the Spanish government “to reduce its deficits at a pace that remains acceptable to Spain’s E.U.
partners, fast enough to rebuild credibility in the market, but also gradual enough not to send the economy in a recession spiral.” Mr. Rajoy has sought to characterize the rescue funds as simply a line of credit, rather than the type of bailout that Ireland, Portugal and Greece have received.
He had, in fact, sought to have funds injected directly into the banks without the government having to act as middleman, a move he had hoped would have allowed it to keep the funds off its balance sheet. But other European leaders made clear Monday that they planned to carefully monitor the bank rescue.
Joaquín Almunia, the European competition commissioner, told Cadena Ser radio on Monday that the International Monetary Fund, European Union officials and the European Central Bank in managing the rescue process — the so-called troika that has managed the other bailouts.
And Wolfgang Schäuble, the German finance minister, said there would be “just such a troika and it will monitor in exactly the same way that the program is complied with, but it is limited to the restructuring of the banking sector.”
Spain, he added, “doesn’t need” the macroeconomic supervision Portugal, Ireland and Greece required; but “the restructuring of the Spanish banking sector has to be negotiated in detail and will be supervised in the same way that they abide by it.”
Fitch Ratings, which last week cut its grade on Spanish debt by three steps to BBB from A, on Monday welcomed the bailout plan, saying it “covers a housing market collapse on a par with that seen in Ireland and is at the extreme end of Fitch Ratings’ stress estimates.”
Fitch had estimated the banks’ capital needs at about 60 billion euros when it downgraded the government’s credit rating, more than the 40 billion euros the International Monetary Fund estimated late Friday. It noted that if Spain were to tap the bailout fund for just that 60 billion euros, the country’s debt would be “on a trajectory to peak at 95 percent of G.D.P. in 2015.”
France, too, is facing a combination of slowing growth and fiscal strain as it tries to bring its budget deficit down to 3 percent of gross domestic product, as mandated by E.U. rules, from the 4.5 percent or more expected this year.
In the latest sign of economic weakness, manufacturing output slid by 0.7 percent in April from March, and 1.8 percent from April 2011, the French national statistical agency, Insee, reported Monday.
There had been speculation that Ireland would seek to renegotiate its own bailout after the Spanish bank rescue. But Brian Meenan, a spokesman in Dublin for the Irish Finance Ministry, said that would not be the case.
Spain, he noted, had failed to win a direct capital infusion, one that would not add to the government’s debt burden, so there was no precedent for Ireland to take advantage of. Spain’s program is meant to provide funds only to banks, and if all goes well should be able to continue borrowing in the market.
But Ireland’s bailout also helps to fund public services, and it is locked out of the market for now. Patrick Honohan, the Irish central bank governor, said in March that the nearly €3.1 billion the government envisioned having to pay annually for promissory notes “has become a source of risk to financial stability.
A way of funding this cash payment over a much longer period would clearly help reduce this risk.”
nytimes.com
Nor is it yet known just how much money will be needed, though the answer to that question should be clearer on June 21, when the government receives the results of analyses being conducted by two consulting firms.
Another open question is whether the funds will come from the European Stability Mechanism, the permanent bailout fund that is supposed to come on line in July, or the European Financial Stability Facility, the existing bailout fund. If the E.F.S.F. is the vehicle, Finland has demanded that Spain offer collateral.
That is not an issue with the E.S.M., assuming it begins operations as planned, because the loans it offers are senior to other debt. The Spanish Economy Ministry said Monday in a statement that the aid would not undermine Spain’s public debt, and would, in fact, “reinforce its overall solvency.”
The government also maintained that it would be able to continue tapping private investors for its financing needs, with the Treasury saying it would “continue to execute its funding program through its regular auction calendar.”
That could prove wishful thinking, however, as it was Spain’s shaky performance in those auctions that led the government and European officials to get serious about working out a rescue in the first place. Investors and officials will be carefully watching Spain’s bond yields over the coming week.
Gilles Moëc, an economist at Deutsche Bank in London, wrote in a note that the fate of the bailout would depend on the ability of the Spanish government “to reduce its deficits at a pace that remains acceptable to Spain’s E.U.
partners, fast enough to rebuild credibility in the market, but also gradual enough not to send the economy in a recession spiral.” Mr. Rajoy has sought to characterize the rescue funds as simply a line of credit, rather than the type of bailout that Ireland, Portugal and Greece have received.
He had, in fact, sought to have funds injected directly into the banks without the government having to act as middleman, a move he had hoped would have allowed it to keep the funds off its balance sheet. But other European leaders made clear Monday that they planned to carefully monitor the bank rescue.
Joaquín Almunia, the European competition commissioner, told Cadena Ser radio on Monday that the International Monetary Fund, European Union officials and the European Central Bank in managing the rescue process — the so-called troika that has managed the other bailouts.
And Wolfgang Schäuble, the German finance minister, said there would be “just such a troika and it will monitor in exactly the same way that the program is complied with, but it is limited to the restructuring of the banking sector.”
Spain, he added, “doesn’t need” the macroeconomic supervision Portugal, Ireland and Greece required; but “the restructuring of the Spanish banking sector has to be negotiated in detail and will be supervised in the same way that they abide by it.”
Fitch Ratings, which last week cut its grade on Spanish debt by three steps to BBB from A, on Monday welcomed the bailout plan, saying it “covers a housing market collapse on a par with that seen in Ireland and is at the extreme end of Fitch Ratings’ stress estimates.”
Fitch had estimated the banks’ capital needs at about 60 billion euros when it downgraded the government’s credit rating, more than the 40 billion euros the International Monetary Fund estimated late Friday. It noted that if Spain were to tap the bailout fund for just that 60 billion euros, the country’s debt would be “on a trajectory to peak at 95 percent of G.D.P. in 2015.”
France, too, is facing a combination of slowing growth and fiscal strain as it tries to bring its budget deficit down to 3 percent of gross domestic product, as mandated by E.U. rules, from the 4.5 percent or more expected this year.
In the latest sign of economic weakness, manufacturing output slid by 0.7 percent in April from March, and 1.8 percent from April 2011, the French national statistical agency, Insee, reported Monday.
There had been speculation that Ireland would seek to renegotiate its own bailout after the Spanish bank rescue. But Brian Meenan, a spokesman in Dublin for the Irish Finance Ministry, said that would not be the case.
Spain, he noted, had failed to win a direct capital infusion, one that would not add to the government’s debt burden, so there was no precedent for Ireland to take advantage of. Spain’s program is meant to provide funds only to banks, and if all goes well should be able to continue borrowing in the market.
But Ireland’s bailout also helps to fund public services, and it is locked out of the market for now. Patrick Honohan, the Irish central bank governor, said in March that the nearly €3.1 billion the government envisioned having to pay annually for promissory notes “has become a source of risk to financial stability.
A way of funding this cash payment over a much longer period would clearly help reduce this risk.”
nytimes.com
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