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Spanish report Spanish report
by Euro Reporter
2010-06-20 08:30:08
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Spain could test the euro to its limit

News that the head of the International Monetary Fund was in the country fuelled swirling rumours that Madrid is about ask for help. Spain has been hammered by collapse of its construction sector and the bursting of a property bubble built on cheap credit that has contaminated financial institutions. One in five workers is unemployed burdening already strained state expenditure further.

Markets have not been reassured by a savage package of Spanish spending cuts and there are growing rumours that Spain needs an urgent EU-IMF cash injection, £200 billion is one rumoured figure. Panicky German officials too have been accused of destabilising Spain amid concerns in Berlin that Madrid is not cutting enough, leaving banks in Germany exposed to market contagion because they own hundreds of billions in Spanish debt. It now has to pay record interest rates to service its debts and Spanish officials this week admitted that financial institutions are struggling to get funding at any price on international markets. To prove that fears of banking failure are unfounded, Spain has promised to publish the results of "stress tests" on its banks, along with other EU countries. But the stress testing will not count how much public debt, in the form of government bonds, is held by banks, dodging the main concern that has sent markets tumbling.

Last week, Herman Van Rompuy, the EU president, admitted that a £626 billion euro zone bail-out fund might need to expand if the debt crisis deepened.  "If the plan were to prove insufficient, my answer is simple: in this case, we'll do more," he said.  But throwing billions more at Spain will be deeply unpopular in countries such Germany, where Angela's Merkel's government is teetering on the brink of collapse after pushing through deeply unpopular loans to Greece and the wider euro zone fund at the same time as savage domestic austerity measures.  Signs of the first cracks are emerging this week after a newly elected government in Slovakia threatened not to pay its share of euro member contributions, totalling £370 billion, into the bail-out fund. The Slovakian position has left the European Commission worried that one country's refusal to help Spain, or others, could start a stampede that would destroy the euro.


Savings Banks heading for a merger

Four Savings Banks – CAM, Caja Cantabria, Caja Extremadura and Cajasur- are about to merge and form the third largest Spanish ‘caja’. They will have assets worth 135 billion €, 14000 employees and as many as 2300 offices. The merger comes at a time when the Spanish economy is being criticized by the IMF for being unable to maintain a hold on the state deficit. The move is being called a “cold or virtual fusion” and will help the individual banks in the creation of a protection system for strengthening solvency.

The way the system will be formed is – CAM and Cajastur 40 percent each, Cantabria 9 percent and Extremadura 11 percent. Under this system, policies which are related to credit rating, treasury, risk regulatory needs and internal control will be the same for all banks, but each of them will retain its regional nature, judicial outlook, community service and governing institutions. The Chairpersons and Directors of all the four banks have signed the “protocol of intentions” and it has been placed on the desk of the Bank of Spain. Now it is dependant on the government and competitive bodies’ authorizations.

The International Monetary Fund, meanwhile, has termed the recovery of the Spanish economy as ‘weak and fragile’ and asked the Spanish government to initiate measures for controlling the state deficit. IMF experts have also said that the Spanish economy is likely to grow only by 1.5 percent to 2 percent in the medium term.


Spanish debt wilts amid €250bn rescue plan confusion

European debt markets remain under high stress on persistent reports that Spain is in secret talks with EU officials and the International Monetary Fund for a support package of up to €250bn (£208bn), the largest rescue in history. The spreads on 10-year Spanish bonds jumped to a post-EMU high of 224 basis points above German Bunds as traders brace for a crucial auction by Madrid on Thursday. The relentless rise in bond yields replicates the pattern seen in Greece at the onset of crisis. Spain must raise €25bn of debt in a cluster of auctions in July.

"We're in a dangerous and stressful situation," said Gary Jenkins, a credit expert at Evolution Securities. "Spain is a big enough borrower to wipe out the EU's rescue fund." Elena Salgado, Spain's finance minister, reacted angrily to a report in the Spanish daily El Economista claiming that the support plans are well advanced. "It has been denied by the Spanish government, by the European Commission, and by the IMF. How much more can we deny it?" she said. The story refuses to die, however. Three German newspapers have run similar stories over recent days, citing German sources. The markets are convinced that some form of contingency planning is underway.

"In our view there is absolutely no doubt that a backstop facility for Spain will be put in place should stress in the system remain," said Silvio Peruzzo, an economist at RBS,  El Economista said officials from the EU, the IMF, and the US Treasury had been discussing a credit line of €200bn to €250bn, dwarfing the €110bn package for Greece. Dominique Strauss-Kahn, the IMF's managing director, reportedly called a secret meeting of the IMF's Board of Directors to tackle the crisis. The loan terms would be softer than the draconian budget cuts imposed on Greece, with the lion's share of the money coming from eurozone states under their €750bn shield. Mr Peruzzo said the facility was likely to resemble the IMF's Flexible Credit Line devised for Poland and Mexico. This is a "precautionary" credit for healthy borrowers facing a "cash crunch". The funds can be drawn at any time, without strings attached.

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