Bloomberg News

Spain Formally Seeks Aid as Debt-Seniority Debate Drags On

June 25, 2012

Spain Formally Seeks Aid as Debt-Seniority Debate Drags On

Spanish banks may need as much as 62 billion euros to withstand a worst-case economic scenario, studies by two consulting firms hired by the government showed last week. Photographer: Angel Navarrete/Bloomberg

Spain formally requested a bailout for its banks as discussions continued as to whether the loan of as much as 100 billion euros ($125 billion) would take precedence over other debts in the event of default.

Doubts over seniority will be resolved within weeks, Deputy Economy Minister Fernando Jimenez Latorre said today, after European officials played down the importance of the issue last week. Euro-area finance ministers still have to decide whether the aid will come from Europe’s temporary rescue fund or its successor, which gives its creditors preferred status, the Economy Ministry in Madrid said in an e-mailed statement.

“The longer the maturity and the grace period, and the lower the interest rate, the lower the risk of it being considered senior,” Jimenez Latorre said in Santander, Spain. The issue will be resolved “satisfactorily,” he said.

Spain agreed on June 9 to the bailout for lenders still reeling from a real-estate collapse in its fifth year. While negotiating the terms of the rescue, Spain is also pushing for greater integration in Europe’s banking industry as it seeks to stem contagion between lenders and the state.

Prime Minister Mariano Rajoy said the so-called banking union should include a fund to restructure and liquidate banks. Spain also backs the creation of a common regulator and rules, as well as a joint deposit-guarantee fund, he told a conference in Madrid.

Banking Union

German Finance Minister Wolfgang Schaeuble also supported the idea of a banking union on June 5, while he stopped short of endorsing the liquidation fund proposed by Rajoy. He sees a banking union as consisting of a central banking oversight body, deposit guarantees and “the question of whether, and if yes, how we can develop national bank restructuring facilities into more of a European network.”

Spanish banks may need as much as 62 billion euros to withstand a worst-case economic scenario, studies by two consulting firms hired by the government showed last week. The International Monetary Fund estimated on June 8 the shortfall was at least 37 billion euros.

Those studies should be taken as a “starting point” as officials prepare the memorandum of understanding for the bank bailout, Economy Minister Luis de Guindos said in the letter sent today in which he formally requested the loan. That agreement will be completed before July 9, when euro-region finance ministers next meet.

Loan Conditions

Conditions attached to the loan will apply to “banks being recapitalized and to the Spanish financial sector as a whole, including its supervision and regulatory requirements,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said today. The EU’s executive arm “likes” the idea of setting up a bad bank in Spain, Jimenez Latorre said on June 21, without giving details.

Jean-Claude Juncker, head of the group of euro-region finance ministers, said he had received the letter and expected to give a mandate to the European Commission, the European Central Bank and the European Banking Authority to negotiate the conditions.

Juncker was among the European officials last week who played down the significance of seniority in the case of the Spanish bailout, saying “it’s not as important a question as it may seem.” Klaus Regling, head of the European Financial Stability Facility, also said the size of the loan, equivalent to 10 percent of Spain’s economy and a “minor part of the total public debt,” means “the issue is not quite as important as one gets the idea reading about it every day.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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


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