Spanish Economy Minister Luis de Guindos said the euro’s future will be played out in the coming weeks in Italy and Spain, as data showed record levels of capital leaving his country.
“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” he told a conference in Sitges, Spain, yesterday. Spain and Italy are where the “battle for the euro” is being fought, he said.
The International Monetary Fund denied that it was preparing financial aid for Spain, as data yesterday showed that 66.2 billion euros ($81.8 billion) of net capital flows left the country in March.
Spain is at the crux of the debt crisis now in its third year as Prime Minister Mariano Rajoy’s government tries to shore up the country’s banks amid a recession and the highest unemployment in Europe. The crisis has exposed the disparities in the 17-nation euro region’s economy, with Spain’s extra borrowing costs over Germany’s rising to the highest in the euro’s history this week.
The yield on Spain’s 10-year government bond was at 6.47 percent at 3:40 p.m. in Madrid versus a euro-era record of 6.78 percent on Nov. 17. German benchmark 10-year yields were at 1.189 percent, while two-year note yields fell below zero for the first time amid demand for the safest assets.
The euro region needs to integrate further in order to overcome the crisis and de Guindos said he expected “signals” in the coming days and weeks on integrating deposit-guarantee funds and banking supervision. “We all agree” on the need to move toward a “banking union,” he said.
Budget Minister Cristobal Montoro also said today the euro region is moving toward greater integration of the banking industry. That should include allowing the European Stability Mechanism to sidestep governments and recapitalize banks directly, he said. The European Commission and the European Central Bank support giving the region’s permanent-rescue fund those powers, even as Germany has said it objects.
“The mechanism of direct aid to banks is part of the European banking union,” he told reporters after the Cabinet meeting.
IMF Managing Director Christine Lagarde said after meeting Spanish Deputy Prime Minister Soraya Saenz de Santamaria in Washington yesterday that the lender is “not doing any work in relation to any financial support” for Spain. De Guindos also denied a report yesterday by the Wall Street Journal that the IMF’s European department started contingency plans for a rescue loan to Spain.
Still, senior executives at Banco Sabadell SA (SAB) and Bankinter SA said Spain’s banking industry was nearer to needing a European bailout since the nationalization of Bankia group on May 9. Maria Dolores Dancausa, Bankinter’s chief executive officer, told Spain’s public broadcaster today that the industry is in a “critical” situation and there may be no alternative to a bailout.
De Guindos said the balance of payments data, which showed an outflow of 97 billion euros in the first quarter, didn’t reflect “capital flight,” and underlined how Spanish banks were struggling to roll over funding on money markets. The outflow from individuals was about 1 billion euros in the first quarter, he said.
“What this shows is not capital flight, but the financing difficulties of Spanish banks in money markets,” he said. “Spanish banks are having growing difficulties accessing money markets mainly in Europe: in the U.S. the money markets are very much closed to all European banks.”
Spanish banks are increasingly dependent on the European Central Bank for funding and data show the nation’s lenders were among the main beneficiaries of the central bank’s three-year financing operations. At the same time, foreign investors are shunning Spanish public debt, making the government reliant on national banks to buy its bonds.
Foreign investors held 37 percent of Spain’s outstanding bonds in April, down from 50 percent at the end of last year, while Spanish banks increased their holdings to 29 percent from 17 percent, Treasury data show. De Guindos said the “fragmentation” and increasing national focus of capital markets is “worrying.”
Still, he’s confident the Greek elections on June 17 will produce a government committed to sticking with the euro and meeting its pledges. That “central scenario” will help bring down Spanish bond yields, he said.
“If in Spain things are done right, the risk premium comes down and we start seeing capital flows moving normally again, that will be a touchstone for the euro project to continue ahead,” he said. “If not, we will have problems for the euro project itself, as we know it.”
To contact the reporter on this story: Emma Ross-Thomas in Madrid at firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com