On first day of trading after Spain bank bailout, relief is short and sweet | iNFOnews | Thompson-Okanagan's News Source

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On first day of trading after Spain bank bailout, relief is short and sweet

A demonstrator talks at a protest against the financial crisis and the latest government Economic measures in Sol square,in Madrid Sunday June 10, 2012. Spain's grinding financial misery will get worse this year despite the country's request for a European financial lifeline of up to a euro100 billion euros ($125 billion) to save its banks, Prime Minister Mariano Rajoy said Sunday, a big blow to a nation that took pride as the continent's economic superstar just a few years ago only to see it become the hot spot in the eurozone debt crisis. A day after conceding Spain needed outside help after months of denying it would seek assistance, Rajoy said more Spaniards will lose their jobs in a country where one out of every four are unemployed as the country becomes the fourth and largest of the 17 countries that use Europe's common currency to request a bailout. (AP Photo/Daniel Ochoa de Olza)

MADRID - Financial markets were barely soothed Monday by a US$125-billion plan hatched over the weekend to rescue Spain's banks.

Instead investors began to question the conditions of the loan package and whether the country could manage the extra debt or be forced ask for more help.

Early in the day, the stock prices of Spanish banks soared and the Spanish government's borrowing costs sank. But that enthusiasm soon gave way to skepticism that the financial lifeline given to the euro region's fourth-largest economy would do much good long-term. The country is in its third year of recession, unemployment is soaring and the rescue loans for Spain's banks will add to the country's debt burden.

Investors are alarmed that by taking by taking on so much new debt via the rescue package, Spain's ability to make interest payments on its debt could be strained dangerously.

The rescue for Spain's banks was portrayed by Spanish and European officials as a bid to contain Europe's widening recession and financial crisis that have hurt companies and investors around the world. Providing a financial lifeline to Spanish banks was designed to relieve anxiety on the Spanish economy — the fourth-largest in the 17-country eurozone.

Spain's Ibex-35 index shot up five per cent on opening, with banks in particular doing very well. But any enthusiasm fizzled out, with the index was up about 1.6 per cent in early afternoon. Bank stocks also started the day strongly. Shares in Bankia, which had requested €19 billion in aid to cover its bad loans and assets, rose about 15 per cent, but later fell back to be three per cent up on the day at €1.06.

The interest rates Spain has to pay on its debt also started the day well. The rate on Spanish 10-year bonds — a direct measure of how much investors trust a country to pay its debt obligations— started with a 17-point drop. But this soon turned into a rise and as of early afternoon it was up nine points at 6.27 per cent edging closer to the seven per cent level where the three other European bailout countries — Greece, Portugal and Ireland — sought international assistance.

Spain had been criticized for being too slow to set out a roadmap to resolve its problem. European business leaders and analysts have stressed that Spain had to find a quick solution so that it was not caught up in any market turmoil sparked by the June 17 Greek elections. There are concerns that anti-bailout left-wing party Syriza could become the largest party in the Greek parliament, putting the country's membership in the eurozone at risk. Investors are also worried that Italy could be next to seek a bailout. The country's recession is deepening, increasing pressure on Premier Mario Monti's government, which is struggling to fend off its debt crisis.

"As much as the perception of the situation in Europe may have changed, plenty of risk still remains in place, with question marks over the ability of Spain to repay the debt, especially, if the country fails to get back on the growth path, the outcome of the upcoming Greek elections and the perception of situation in Italy," Anita Paluch of Gekko Global Markets wrote.

Eurozone finance ministers said Saturday they would make the loan of up to €100 billion available to the Spanish government to prop up banks laden with non-performing loans and other toxic assets after the collapse of a real estate bubble. Recession-hit Spain has yet to say how much of this money it will tap while it waits for the results of two independent audits of the country's banking industry. The bailout loans will be paid into the Spanish government's Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country's teetering banks.

In a report it released late last week, the International Monetary Fund estimated Spain needs at least around €40 billion.

Investors now are very eager to know how much Spain asks for to strengthen its banks and how large a safety margin of extra money it allows itself to cushion itself against further shocks.

"People in the financial markets will be very keen to know what that cushion is, particularly in an environment where the real economy is in poor condition," said Mark Miller of Capital Economics in London.

Spain's economy is in recession, the second in three years while its jobless rate is nearly 25 per cent.

"Markets will certainly ask the question about whether a second bailout might be required and the margin for error between the sort of €40 billion the IMF is saying and the €100 billion ceiling in terms of what we heard," Miller said.

Miller added that with the bailout, Spain's debt-to-gross domestic product ratio — which was a relatively low 68.5 per cent at the end of last year — could shoot up to the 90s next year. And bond yields will remain high.

If the ratio gets up to Greek levels of 120 per cent or so, and 10-year yields back to the near-7-per cent levels of a few weeks ago, "then people will ask that question about a second bailout," Miller said.

Another issue is whether the European money comes with strings attached for the government, and not just an obligation for banks to restructure. When the bailout was announced on Saturday, Spanish Economy Minister Luis de Guindos said the rescue would not force any new austerity measures on the government.

And speaking to reporters Sunday, Prime Minister Mariano Rajoy avoided using the term 'bailout' to describe the aid, calling it instead a credit line without the strict austerity conditions that have accompanied bailouts for Greece, Portugal and Ireland.

However, on Monday the European Union made clear the money is more than just a loan. Besides being paid back with interest, there will be strings attached for the Spanish government.

"When people lend money, they never do it for free. They want to know what is done with the money," said Joaquin Almunia, the European Competition Commissioner.

"I am not talking about the just the obligation to pay back the money, but also some other kind of terms," he told Cadena Ser radio, adding that these remain to be determined.

But the economy ministry later released a statement saying the package entails "the necessary conditionality for the financial sector" but no new fiscal consolidation or structural reforms beyond those the government has already embarked on.

The loan will be supervised by the European Commission, the European Central Bank and the IMF, Almunia said.

A European Commission spokesman, Amadeu Altafaj, told Spanish state television that this troika will have people on the ground overseeing the restructuring of the Spanish financial sector.

He noted that last month the European Commission recommended Spain undertake further reforms such as speeding up the phasing of a higher retirement age — it is to go from 65 to 67 — and raise VAT sales tax. The newspaper El Pais quoted EU officials Monday as saying these changes and others are part of the conditions that come with the bank rescue package.

News from © The Associated Press, 2012
The Associated Press

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