The EU yesterday urged Spain to come clean on how it plans to finance the overhaul of its banking sector, warning that uncertainty over this has contributed to the recent market turmoil and the country’s soaring borrowing costs.
As Spanish Deputy Prime Minister Soraya Saenz de Santamaria headed to Washington to discuss the country’s economic crisis with US Secretary of the Treasury Tim Geithner and IMF Managing Director Christine Lagarde, European Commission spokesman Amadeu Altafaj told Spanish National Radio that Madrid needed to spell out quickly how it plans to finance the recapitalization of troubled lender Bankia SA and whether there are other banks burdened by toxic real estate assets that might need assistance.
The government nationalized Bankia earlier this month, and the 19 billion euros (US$23.63 billion) in public money that will need to be injected is more than twice what the government had estimated.
Doubts over how recession-hit Spain will handle the bailout have sparked concerns that the country itself will soon follow Greece, Portugal and Ireland and ask for financial assistance itself.
Spain’s borrowing costs on the international debt markets — a sign of investor confidence in how well it can pay off its debt — have hit worrying levels, while its stock prices have been taking a pounding.
“No one can expect that, with these negative results of some banks, the markets can react with euphoria,” Altafaj said.
He said it would clearly be better if the Spanish government turned to capital markets to finance the clean-up of Bankia, Spain’s fourth-largest bank, but added that if it is going to need external money, it should say so soon.
“What you cannot do is maintain this uncertainty, which is what is dragging down market confidence,” the spokesman said.
Speaking in Brussels yesterday, European Central Bank President Mario Draghi criticized national regulators — including Spain’s — for choosing “the worst possible way” to help their banking sectors by delaying tough decisions.
Citing the example of Bankia’s current bailout, Draghi hit out at Spanish banking authorities for underestimating the extent of the nationalized lender’s problems and “then come out with a first assessment, a second, a third, fourth.”
Meanwhile, Spanish Prime Minister Mariano Rajoy’s efforts to contain the crisis have won praise from German Chancellor Angela Merkel.
Rajoy “has inherited a difficult situation. He had to implement many structural reforms,” Merkel said yesterday.
“He is the first who has taken up the decision with determination to bring transparency to the situation. That’s a right and important step,” she said.
However, in a further blow for Spain, Fitch ratings agency yesterday downgraded the creditworthiness of eight Spanish regions. Like the country’s banks, Spain’s autonomous regional governments are burdened by heavy debts.
Fitch said in a statement that the downgrades “reflect the negative economic and market environment in Spain, which has resulted in depressed fiscal revenues, and the structural fiscal deficits of the regional administrations, which will require considerable additional efforts to be reduced, and also the difficulties in accessing long-term funding.”