Bloomberg News

ECB’s Paramo Says Spain Has Room on Bank Recapitalization

May 31, 2012

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said Spain has room for maneuver in recapitalizing its banks through its Fund for Orderly Bank Restructuring.

“The government has front-loaded the issuance program this year so there is some room in case of need for public funds through the FROB,” Gonzalez-Paramo, 53, said in an interview in Frankfurt today, his final day at the ECB. “There is now progress on the external evaluation of the banking-sector needs and these will be known in one month’s time.”

Spain, which this month nationalized Bankia group, the country’s third-largest bank, is trying to shore up lenders and help cash-strapped regions as its own 10-year bond yields approach the 7 percent level that prompted bailouts in Greece, Ireland and Portugal. Economy Minister Luis de Guindos has tasked consulting firms to carry out a valuation of banks’ books.

Gonzalez-Paramo said “it’s for the government to decide which is the way they should push” on addressing the weaknesses of Spain’s banking industry.

Spanish Prime Minister Mariano Rajoy said this week that the region’s permanent rescue fund, the European Stability Mechanism, should be allowed to shore up distressed lenders directly, bypassing national governments. German Chancellor Angela Merkel opposes using the ESM to directly recapitalize euro area banks without first asking national governments.

“We have always favored that the ESM would be able to recapitalize banks directly, instead of going through governments,” Gonzalez-Paramo said.

Bond Purchases

While agreeing with Rajoy on bank recapitalizations, Gonzalez-Paramo rejected his call for help in reducing Spain’s borrowing costs through ECB bond purchases.

“We have explained time and again that the Securities Markets Program is a monetary policy instrument that was created at a very special time to tackle disruptions in sovereign bond markets,” Gonzalez-Paramo said. “This is a program that has the euro-zone interest in sight. It’s part of the tool box and used in conjunction with all the other monetary policy instruments.”

The ECB hasn’t bought bonds in almost three months after it provided more than 1 trillion euros ($1.2 trillion) in cheap loans to the banking sector through its Longer Term Refinancing Operations program, increasing pressure on governments to implement reforms. While leaders have agreed on a fiscal compact to strengthen euro members’ budgets, they’re disagreeing on how to restart the region’s ailing economies.

ECB Forecasts

Stronger growth in Germany, Europe’s largest economy, kept the euro area out of recession in the first quarter. Since then, business confidence in the 17-nation currency region tumbled to the lowest in 2 1/2 years and manufacturing and services output contracted more than economists estimated.

The ECB will publish new growth and inflation forecasts next week and “up to this moment, we stick to our view that there are downside risks to the outlook, but on inflation, risks remain balanced,” Gonzalez-Paramo said. Policy makers will evaluate “in real time” whether new stimulus is needed, he added.

“We should not forget that the two LTROs announced last year were addressed to very specific funding problems in the banking system,” Gonzalez-Paramo said. “And thanks to these two operations, the funding of the banking system in the euro zone is well covered into 2013. Depending on the issues that the Governing Council would identify, you’ll see either more measures or no measures because the previous ones still have some time to go. They have not had the full effect we’re expecting.”

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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