Mon, Jun 04, 2012 page10

• ANALYSIS: Spain rescue could cost 450bn euros

  • AFP, MADRID
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  If Spain cries out for a financial rescue, analysts say the price could be between 150 billion and 450 billion euros (US$186 billion to US$560 billion) or, in the most worrying scenario, simply “unknown territory.”

  Spanish Prime Minister Mariano Rajoy’s conservative government refuses even to countenance a bailout.

  However, markets are remorseless. Ten-year government bond yields, or interest, pierced 6.7 percent last week. When compared with German debt, the extra rate charged on Spanish bonds hit 5.48 percentage points on Friday, a euro-era record.

  Latest figures showed a net 97 billion euros of investors’ money fled Spain in the first three months of the year — the highest on record.

  In such an environment, how can Madrid finance a banking rescue — stricken lender Bankia alone is seeking a total of 23.5 billion euros — and pay for the state’s new expenses and existing debts?

  “Against this background, it now appears all but inevitable that Spain will require a considerable bailout package to support its banks, if not the wider economy,” London-based Capital Economics wrote in a report.

  The task is daunting: Spain’s economy is the fourth-biggest in the eurozone and accounts for 12 percent of the region’s output — twice that of heavily indebted Ireland, Portugal and Greece combined.

  JP Morgan chief Europe economist David Mackie said Spain wanted the European Central Bank to buy its sovereign debt and for European rescue mechanisms to intervene directly in its banks.

  “Spain looks to have gotten to the point where it cannot bear the burden alone,” he said.

  However, European officials say Madrid would have to negotiate a formal rescue, even if the money only goes to the banks.

  Whatever the format, the price could be high, considering Spain’s size. A bailout of Ireland cost 85 billion euros, one for Portugal was 78 billion euros and Greece, so far, 292 billion euros.

  Spain’s financing needs this year are estimated at 86 billion euros, of which half has already been raised.

  In addition, Spanish regions have debt financing costs of 36 billion euros, to which must be added 15 billio to 16 billion euros in deficit financing, Spanish media have reported.

  Banks, heavily exposed to the collapsed property sector, could need 60 billion euros, according to the International Institute of Finance.

  However, a bailout would have to tide Spain over for several years.

  A report for clients by HSBC calculated that over three years, the costs would be 450 billion euros, of which 100 billion euros would go toward the banks.

  However, it said that such a scenario is unlikely because no one wants to see Spain being thrown an international rescue line because it would signal that the euro crisis had reached an entirely new level.

  JP Morgan tips a bill of 350 billion euros, including 75 billion euros to cover the financial sector up to 2014.

  Edward Hugh, an economist in Barcelona, was more pessimistic about the state of the banks.

  “Some sort of attempt to rescue Spain is likely and it is likely to come in July,” he said, after the June 17 Greek election and once the 500 billion-euro European Stability Mechanism is operational. “Up to now, they have been hoping, I think, that they could be doing just something like recapitalization of the banks, which in my opinion could be anything up to 200 billion euros.”

  The cost of a Spanish financial sector rescue will mount if external auditors decide that banks should increase provisions against home mortgages, the analyst added.

  “What they don’t want to do because of the size of it is to take Spain out of the market altogether. The whole situation is pushing them towards this. We are really entering unknown territory,” Hugh said.
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