Spain formally asks for EU bailout money
Open Europe warns that Spanish house prices may drop another 35pc, and that the country’s banking sector could need an immediate €110bn capital injection to withstand potential losses. Perhaps it’s a good thing that Spain avoided putting an exact figure on their rescue request. Open Europe’s head of economic research, Raoul Ruparel, said:
Quote Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and eurozone economy continues to deteriorate. Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full eurozone bailout.
With Spain facing funding costs of €548bn over the next three years, the eurozone’s bailout funds are not equipped to handle a Spanish rescue. To avoid such a scenario, the current bank bailout plan just has to come with the right conditions – including losses for bank bondholders and bank wind-downs.
Fitch has downgraded Cyprus to junk, citing the increasing cost of rescuing its banks, which are heavily exposed to Greece. The agency lowered the rating by one notch to BB+ from BBB- and kept a negative outlook, so more downgrades are possible, although there isn’t much further it can go… The island is on the verge of asking for a bailout, but it isn’t yet clear whether that rescue will come from within the eurozone or from Russia.
The formal bailout request came in the form of a letter from Spain’s economy minister Luis de Guindos to Eurogroup head Jean-Claude Juncker (the two have a good working relationship, as you can see in the image below).
No exact details were included, but it’s hoped that a memorandum of understanding will be sorted in time to be discussed at a July 9 meeting of the Eurogroup. The letter did say that the money, however much there ends up being, would be funnelled to struggling banks through the state-backed Fund for Orderly Bank Restructuring.
AFP reports that Spain has requested up to the full €100bn figure which was originally floated, despite independent reports that suggested a figure of “only” up to €62bn was needed. Although the letter lacks detail – the exact amount needed will be added in later. As expected, Spain has this morning formally requested its bank bailout from the Eurogroup. Two independent reports published last week claimed that the country needed up to €62bn to recapitalise its banking sector: it’s not clear yet how much Spain has requested, but we’ll bring you more as we have it. France has to find up to €10bn to bring its public deficit back to 4.5pc of GDP, says finance minister Pierre Moscovici. European markets are open for the week and, already, it’s red across the board. The FTSE 100 has dropped 0.34pc, the CAC has slipped 0.82pc, the DAX by 0.95pc, Spain’s IBEX has lost 0.93pc and the FTSE MIB is off 0.94pc.
David Miles, who sits on the Monetary Policy Committee, believes the Bank of England should inject a further £50bn into the economy, taking its QE programme to a total of £375bn. Speaking in an interview with the Financial Times this morning, he said:
Quote The right strategy has been super-expansionary monetary policy and… making monetary policy yet more expansionary has been the right hing over the last three or four months.
Billionaire investor George Soros thinks Europe should start a fund to buy Italian and Spanish bonds, warning on Bloomberg TV that a failure to produce drastic measures at this week’s EU summit could spell the demise of the currency.
Quote Merkel has emerged as a strong leader. Unfortunately, she has been leading Europe in the wrong direction. Germany will only do it if Italy and Spain really insist on it, because they are the ones who are hurting.
Policy makers should create a European Fiscal Authority to purchase sovereign debt in return for Italy and Spain making budget cuts, Soros said in an interview at his house in London. Funding for the purchases would come from the sale of European Treasuries, which would have low yields because they would be backed by each euro member.
And he’s obviously very keen on the plan, because he’s written a paper laying out all the details and sent it to European leaders… The illness of Antonis Samaras has also caused the the troika to postpone its visit to Athens, which was scheduled to begin today.
06.50 As we reported before the weekend, this week’s EU summit has been hit by an untimely complication as the new prime minister and finance minister are unable to attend because of poor health.
Antonis Samaras underwent eye surgery on Saturday and Vassilis Rapanos is in hospital after suffering from nausea. Instead, Greece’s foreign minister and outgoing finance minister will attend the meeting, which takes place on Thursday and Friday.
European leaders will discuss a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund. Greece will be asking for more time to complete its bailout reforms, while Germany will be doing all it can to resist.
Asian stocks have mostly drifted lower as investors grow cautious ahead of a critical EU summit later this week, where Greece will attempt to win some wiggle-room on the pledges it promised to enforce in return for its bailout.
Japan’s Nikkei 225 is 0.42pc lower and South Korea’s Kospi has slid 1.11pc.
06.38 The Bank of England could be putting the economy at risk by persisting with low interest rates and money printing, according to the world’s central banking supervisor.
In an annual report spanning 214 pages, the Bank for International Settlements warned that artificially low rates and inflated asset prices could be holding back growth by masking lenders’ bad debts and deterring them from cleaning up their balance sheets. Philip Aldrick reports:
“Prolonged and aggressive monetary accommodation may delay the return to a self-sustaining recovery,” BIS said. “It can undermine the perceived need to deal with banks’ impaired assets.”
Political pressure for loose monetary policy, including quantitative easing (QE), also threatened to damage central banks’ credibility and destroy their independence, BIS said.
The world’s financial regulator spelt out the risks of relying too heavily on the likes of the Bank of England and other central banks as it pressed Europe’s leaders to step up their efforts to fix the eurozone’s problems.
Throwing yet more money at the vulnerable countries and calling this by a fancy name is not an answer. Just as with the Gold Standard and with Bretton Woods, the system has to break.
But doubtless the participants at this week’s summit will smother themselves in every sort of illusion in order to avoid facing up to that uncomfortable reality.
In the end, market processes will overwhelm them. The bond markets are currently the most obvious threat. But I suspect that the irresistible pressure will come as depositors move more euro deposits out of the vulnerable countries and into German banks. Under the current set-up, the money is pretty much automatically recycled via the ECB to the weak banks. The result is that Greek depositors are already protecting themselves against the consequences of a Greek default and euro exit by shifting the risk onto European taxpayers.
When the country in question is Spain or Italy the amounts involved will be so huge that the ECB would have to stop its recycling activities pretty quickly. And that would send these countries into a banking crisis from which the only escape would be euro exit.
Stop complaining and start doing. That was the frank message from Wolfgang Schaeuble, Germany’s finance minister, to Greece yesterday, as he said the country should stop asking for more help and start work on implementing the reforms it has already promised. Alistair Osborne reports:
In unusually blunt remarks, German finance minister Wolfgang Schaeuble said: “The most important task facing new prime minister [Antonis] Samaras is to enact the programme agreed upon quickly and without further delay instead of asking how much more others can do for Greece.”
His comments highlight Germany’s growing impatience with the eurozone’s problem nations in what is shaping up to be another significant week for the single currency bloc.
[...] Greece’s new three-party coalition government took charge on Thursday, vowing to renegotiate the terms of its latest €130bn bailout. It wants a two-year extension to the 2014 deadline for it to cut its budget deficit to 2.1pc of GDP from 9.3pc in 2011. Such delay would, however, require up to €20bn more foreign funding.
Good morning and welcome back to our live coverage of the European debt crisis.