Connect to share and comment

Spain says banks need $77 billion to survive

As a new audit reveals the scale of the country’s banking black hole, Germany makes it harder to climb out.

Madrid protests 09 28 2012 Enlarge
Protesters in Madrid on Friday. (Dominique Faget/AFP/Getty Images)

BRUSSELS, Belgium — European governments struggling to clamber from the euro crisis have issued a series of mind-numbing figures this week.

The latest from Spain on Friday revealed that its cash-strapped banks need $77 billion to stay afloat, the same day France announced a "combat budget" that bucks Europe’s austerity trend by raising taxes by $26 billion.

A day earlier, the Greek government agreed on $17 billion in spending cuts that would throw 15,000 civil servants out of work and cut wages for the rest up to 30 percent.

Spain's 2013 budget, also unveiled on Thursday, ordered ministries to slash spending by $51.3 billion.

However, the succession of painful initiatives to cut debt and deficits may be undermined by the outcome of a discreet meeting in a country house deep in rural Finland.

That’s where the pastel Konigstedt Manor, on a riverbank north of Helsinki, played host to a meeting Tuesday between German Finance Minister Wolfgang Schauble and his counterparts from Finland and the Netherlands.

More from GlobalPost: Spain risks further unrest with austerity budget

They emerged to issue a statement that stunned the euro zone's needier nations and underscored the divisions that have dimmed hopes that Europe may have found a path out of the crisis.

Schauble and the others said a pledge by euro zone leaders at a summit in June to use the European Stability Mechanism, a new $900 billion firewall, to directly help banks did not apply to existing bank debts. That implies that countries such as Spain and Ireland would have to use government money to get their banks out of their current mess.

Condemnation followed quickly. Shane Ross, an independent member of Ireland's parliament, called the decision "a disaster for the attempts to get out of debt."

"This is the most damaging statement on Ireland to come from the European Union in living memory," he told the assembly in Dublin.

"Germany to Spain and Ireland: drop dead," wrote Irish economist Karl Whelan in Forbes magazine.

Some believe the new position by three of the euro zone's stronger economies violates a commitment by German Chancellor Angela Merkel and other leaders at the June summit to give the firewall fund the "possibility to recapitalize banks directly."

The leaders' promise to "break the vicious circle" between bank and state debt had played a large part in giving the euro zone some respite from market pressure over the summer.

"Spain’s premier Mariano Rajoy has been betrayed," Ambrose Evans-Pritchard, international economics editor of Britain's Daily Telegraph newspaper, opined. "Can we believe anything that the chancellor of Germany, the prime minister of Holland and the prime minister of Finland say from now on?"

The head of Germany's central bank joined the fray, insisting individual euro zone countries must remain responsible for the existing liabilities of their banks, regardless of any eventual "banking union" among euro zone nations.

"Pooling risks cannot be the main purpose of a banking union," said Bundesbank President Jens Weidmann on Friday. "Countries must be responsible for contamination in bank's balance sheets that occurred under their national supervision, everything else would be a financial transfer under the guise of a banking union."

Weidmann was the sole European Central Bank board member to oppose the bank’s plan this month to help halt the euro crisis by buying struggling countries’ bonds in unlimited amounts.

Rajoy may feel particularly peeved by the latest German stance. The Spanish prime minister was hoping the European Stability Mechanism would step in to support his troubled banks as he struggles under the weight of mounting pressures: recession, Europe's highest unemployment, violent street protests and a drive for secession in the Catalonia region.

Instead, it appears he’ll have to fall back on a $129 billion credit line agreed by the euro zone to provide funds for his government to bail out the banks — at the cost of increasing Spain's national debt.

According to Thursday's budget, servicing the debt is already forecast to eat up $50 billion next year, adding to pressure on Rajoy to seek ECB support to bring down borrowing costs.

At least Friday's long-awaited banking stress test was largely surprise-free. It showed many of the country's best-known banks, including Banco Santander and BBVA, are in good shape, and that seven institutions — mainly highly indebted regional savings banks — need additional capital of $77 billion.

"The results confirm that the Spanish banking sector is mostly solvent and viable, even in an extremely adverse and highly unlikely macroeconomic setting," an Economy Ministry statement said. It pointed out that banks given a clean bill of health represent 63 percent of the sector.

Worst off is Bankia, Spain's fourth-largest bank, formed in 2010 from seven troubled saving banks. Its capital needs are estimated at $32 billion.

More from GlobalPost: Hollande hits France's rich with 75 percent tax rate

The amount Spain eventually seeks from Europe for its banks could be as low as $51 billion, said Fernando Jimenez Latorre, state secretary for the economy, thanks to the impact of mergers, bank efforts to raise capital of their own and other measures.

In Brussels, the European Commission welcomed the report as a "major step... toward strengthening the viability of and confidence in the Spanish banking sector."

Meanwhile in Paris, the Socialist government elected in June unveiled its first budget, which largely avoids the austerity undertaken by France’s southern neighbors. Instead it contains stiff tax hikes for the rich designed to bring the country's deficit down next year to the euro zone's target level of 3 percent of gross domestic product.

Prime Minister Jean-Marc Ayrault called it a “combat budget.”

"It's a combat budget to get the country back on track, a combat budget to fight against an ever-growing debt burden for the French people and future generations."

The budget includes a salary freeze and $13 billion in spending cuts, but measures such as a 75 percent tax on the super-rich are designed to meet President Francois Hollande’s promise to pursue growth over austerity.

Ayrault's plans are based on an economic growth forecast of 0.8 percent next year and 2 percent in 2014. However, France's hopes of achieving that level of recovery will depend on the euro zone’s navigating its way out of the debt morass. 

http://www.globalpost.com/dispatch/news/regions/europe/120928/Spain-banks-euro-crisis-Germany-France