Spain admits it needs help to fund banks

June 5, 2012

Europe's financial crisis is triggering global alarm as Spain's teetering banking sector prompted an emergency discussion by international finance officials and warnings that the continent is running out of time to fix its deepening troubles.

Prime Minister Stephen Harper on Tuesday echoed growing frustrations among leaders that Europe is failing to take quick action to stabilize its financial woes.

Finance officials of the G7 countries, including Canadian Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney, held a conference call Tuesday to explore options to assist Europe. The region is grappling with a debt crisis and deteriorating finances of major banks as some depositors in troubled countries such as Spain and Greece shift funds to more secure financial institutions.

The ministers "reviewed developments in the global economy and financial markets and the policy response under consideration, including the progress toward financial and fiscal union in Europe," said a statement from Mr. Flaherty's office. White House spokesman Jay Carney said: "European leaders seem to be moving with a heightened sense of urgency and we welcome that. We are hoping to see accelerated European action over the next several weeks."

"I don't want to sound too alarmist, but we are kind of running out of runway here," Mr. Harper said in an interview with the CBC's Peter Mansbridge. Structural changes to the euro zone are urgently needed, he said. "We just can't constantly deal with short-term problems. We've got to have a plan to make this a stable situation," Mr. Harper said in an interview that was taped in London Tuesday for The National.

"I think what has to happen is there has to be a serious examination of the shortcomings of the euro structure," Mr. Harper said, adding that "euro central institutions, whether it be fiscal policy, monetary policy, financial regulation, are simply not as robust as they are in a currency that has a national government behind it."

Mr. Harper was set to meet with French President François Hollande in Paris on Thursday.

Mr. Carney of the Bank of Canada warned on Tuesday that the global economic outlook has "weakened in recent weeks," and "risks around the European crisis are materializing." Mr. Carney's comments showed an elevated concern about Europe's woes, compared with a previous view that the situation in Europe had shifted "from the acute to the chronic." Mr. Carney on Tuesday left the bank's key interest rate at 1 per cent for the 14th consecutive rate decision.

Mr. Flaherty this week expressed frustration with Europe's deepening crisis, pointing to "undercapitalized" banks in the region.

Spanish Budget Minister Cristobal Montoro on Tuesday said the country's banks need to be propped up with a cash injection, and called on the broader European community to pitch in, saying it's "important that the European institutions open up and help us."

The comments heightened fears that Spain is on the verge of becoming the fourth euro-zone country to seek emergency international financial assistance.

Estimates of the capital needs of Spanish banks range widely. Analysts at UBS have estimated that the Spanish banking system might need as much as €120-billion of fresh capital. But Emilio Botin, chairman of Banco Santander, Spain's biggest bank, said Monday that Spain's banks would need €40-billion to bolster their capital bases. Mr. Montoro neither rejected nor endorsed that figure.

For the first time, Mr. Montoro said Spain is losing access to the debt markets as its sovereign funding costs creep ever higher, to the point they are not far short of the 7-per-cent level that ultimately triggered the bailouts of Greece, Ireland and Portugal.

"What that premium says is that Spain doesn't have the market's door open," he said Tuesday on Onda Cero radio. "As such, the challenge is to open that door and regain the confidence of those markets, our creditors."

His admission was widely seen as ratcheting up the pressure on the euro-zone countries in general, and Germany in particular, to accept and put some flesh on the "banking union" idea.

The proposal, backed by France and Italy, would see a euro-zone-wide deposit-insurance scheme, a bank-restructuring fund and a supranational banking supervisor, though details are scant. The goal is to prop up ailing banks and prevent bank runs. In recent months, the spectre of failing banks has displaced the debt crisis as the biggest threat to the euro zone.

In a note Tuesday, RBC foreign exchange research said, "The comments from Montero appear to be an attempt to pile on the pressure on the rest of Europe to do more – he asks for leaders to agree on a banking union by the end-June summit (though the chances of that are very small indeed)."

While German Chancellor Angela Merkel is open to the notion of greater oversight of European banks – she said so Monday – she has stopped well short of endorsing a full-fledged banking union. Her fear, apparently, is that German savers would find themselves backstopping bank deposits in the weak euro-zone countries, a potentially limitless exposure. Some economists think the German constitutional court would declare joint deposit insurance illegal.

Mr. Montoro and the Spanish government are being careful to describe their plea for financial help as an effort to stabilize the country's banks, not a full-blown sovereign bailout. He said the bank funding needs are not an "excessive" amount. "We're not talking about an astronomical figure," he said in the radio interview.

Spain's biggest single banking problem is Bankia, which was formed by the union of seven troubled regional savings banks in late 2010 and has suffered ever since because of its heavy exposure to the country's collapsed real-estate market. Madrid said Bankia requires €19-billion in fresh capital. The government's plan to prop it up with the equivalent value in Spanish bonds, which could be swapped by the bank for cash at the European Central Bank, was recently shot down by the ECB.

As Mr. Montoro made his plea for banking financing, the G7 finance ministers used a Tuesday conference to call for a tighter fiscal union in the euro zone. The call was seen as a preparatory session for the wider Group-of-20 summit in Mexico on June 18-19.

Spain has not made a formal request for financial assistance for its banks. A test of the country's ability to fund itself – and therefore its banks – will come on Thursday, when it is to auction as much as €2-billion of bonds.

Editor's note: An earlier version of this story misstated the date of Prime Minister Stephen Harper's meeting with French President François Hollande. This version has been corrected.

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