Despite reassuring comments from its prime minister, pressure is growing on Spain to seek European Union help for its troubled banks as its borrowing costs surge to near-unsustainable levels. The risk premium, which measures the spread between Spanish and German benchmark bonds, jumped to the record level of 510 basis points on Monday - a level which the economic daily Expansion describes as "critical."
Shares in distressed bank Bankia, meanwhile, dropped by as much as 29 per cent on the Madrid stock exchange, while the Ibex 35 index had fallen by 1.35 per cent by mid-afternoon. If such developments continue and the Greek financial crisis keeps piling up pressure on Spain, the government may have to seek EU funds for Spanish banks, the daily El Mundo quoted government sources as saying. Officially, however, the government continues to reject such a possibility. "There will not be any rescue of Spanish banks," Prime Minister Mariano Rajoy pledged on Monday.
Spain's public sector will supply the necessary funds in the form of capital or credits, budget secretary of state Marta Fernandez said. A bank rescue would be the "the second-to-last step" towards a full-scale financial rescue, El Mundo wrote in an editorial. The eurozone's fourth-largest economy does not want to follow Greece, Ireland and Portugal in needing to accept from the EU and the International Monetary Fund a bailout that would come with the imposition of draconian conditions and would damage Spain's image.
The new rise in Spain's risk premium followed an announcement on Friday that Bankia, Spain's fourth-largest bank, was seeking 19 billion euros (24 billion dollars) in government funds.
That came on top of the 4.5 billion euros already received by Bankia, the Spanish bank most exposed to the collapse of the country's property bubble, which left it with nearly 32 billion euros in toxic real estate assets. This means that one single banks needs more than what the government had estimated for all Spanish banks put together - that is, 15 billion euros.
According to analysts, the government's gross under-estimate and its constantly changing forecasts of Bankia's needs have produced an image of improvisation, eroding market trust in Spain. "The government is always behind reality," economist Joaquin Estefania wrote in the daily El Pais. There is also uncertainty about where the government would get the money that it needs to pump into Bankia.
The bank restructuring fund FROB does not have nearly enough liquidity available, and Spain's high borrowing costs make it difficult for the government to keep issuing more debt. Instead, the government may decide to recapitalize Bankia with government bonds in return for shares in the bank. Bankia could then use the bonds to obtain cash from the European Central Bank, according to news reports.
Such a strategy, however, is deemed likely to further increase investor distrust - especially if Spain needs to pour even more money into its banks. The government is already preparing to inject 30 billion euros into banks such as Catalunya Caixa, Novagalicia and Banco de Valencia, El Mundo reported.
That would bring the entire cost of shoring up the banking sector up to about 50 billion euros, according to many analysts. Some of them even believe Spanish banks may need more than twice that much. Rajoy's claims that Spain does not need European funds for its banks are being met with "general incredulity," Estefania argues.
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