EU: Spain Banks Will Be Monitored

The European Commission on Monday said the so-called “troika” that includes the European Central Bank and the International Monetary Fund will monitor Spain’s €100 billion ($125 billion) banking bailout, suggesting the deal agreed on over the weekend may be more stringent than signaled by Madrid.

Statements about the bailout by Spain and the European Union have left several open questions, including the exact amount of aid the country will need and how the funds will be disbursed. Spanish Prime Minister Mariano Rajoy said Sunday the deal will only include conditions related to the banking sector, and made no reference to any external monitoring of the process—a possibility that Madrid was explicitly ruling out last week.

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Speaking in an interview with Spanish radio network Cadena Ser, European Commission Vice President Joaquín Almunia Monday said the commission will have a significant role in the process and it plans to monitor the individual restructuring plans of every bank funded by the facility.

“Whoever gives money, never gives it for free,” Mr. Almunia said. “There are people coming here [to Spain] to make sure the money will be properly used.”

Further complicating the issue, German Finance Minister Wolfgang Schäuble stressed that this supervision will be limited to the banking sector. But European Commission spokesman Amadeu Altafaj, who like Mr. Almunia is Spanish, said the loan’s disbursement will also be subject to the country hitting previously agreed macroeconomic targets.

Other conditions are cited in a statement released Saturday by EU finance ministers, which highlights that the implementation of structural reforms requested by the EU commission “will be closely and regularly reviewed also in parallel with the financial assistance.”

This conditionality contrasts with the statements made by Madrid officials, as they look to make a clean break with the bailouts previously requested by Greece, Portugal and Ireland. But it also falls short of the painful economic overhauls demanded by these countries in exchange for aid, as they signed detailed memoranda in which specific changes to laws and regulations are requested by creditors.

Spain is slated to sign such a document before it receives any aid, but EU officials have said the conditions attached should be less strict, in an attempt to portray the bank rescue as a limited intervention that falls short of the other euro-zone rescues.

Last month, the European Commission said Spain should deepen growth-friendly reforms, including further steps to kick start a comatose labor market, and ensure that spending-prone regions meet tough targets for budget deficits. It also reiterated a call to increase tax revenue from a below-EU-average 32% of gross domestic product, preferably through higher environmental taxes and an increase in the value-added-tax, which at 18% is one of the lowest in the euro zone.

These demands come as the Spanish government is struggling to rein in its runaway budget deficit, despite a raft of measures to raise taxes and slash spending.

Spain’s budget deficit stood at 8.9% of gross domestic productlast year, well above the 6% of GDP Madrid had targeted. Current plans call on Spain to lower its government budget deficit to 5.3% of GDP this year and 3% of GDP next year.

Mr. Altafaj said Monday that the commission expects that Spain will reach its targets for this year.

However, the commission has already signaled it may give Spain one extra year to reach the targets, which many economists warn are extremely hard to attain, provided that Madrid presents a clear plan to rein in “excessive spending…especially in its autonomous regions”.

Meeting the deficit targets is even more of a challenge with the Spanish economy expected to contract by 1.7% this year.

[euspain0611]Reuters

European Union Competition Commissioner Joaquin Almunia in a May photo.

Mr. Altafaj said the commission expects the Spanish government to make a formal request for aid before June 21, when euro-zone finance ministers meet in Luxembourg and two independent audits of the banks’ capital needs are issued.

The banks needing financial assistance would be “identified in next few days and weeks,” he said.

Regarding other details of the package, Mr. Altafaj said the interest rate to be paid by Spain will be between 3% and 4%, in line with that paid by Ireland. The exact rate is yet to be decided, Spain’s treasury said in a statement.

The treasury also said the banking aid deal will have no effect on its planned bond issues for the remainder of the year. This is key for Madrid, as Spain needs to maintain access to the markets to avoid a bailout of its whole economy, as happened with Greece, Portugal and Ireland, something the EU may not be able to fund.

But Spanish government bond prices fell Monday, after an initial relief rally, as concerns mounted that the deal will load more debt onto the Spanish state and threaten to subordinate bondholders behind official creditors.

Spanish 10-year yields, which had earlier dropped to just above the psychologically important 6% level, in early afternoon traded 0.24 percentage point higher at 6.43%, according to Tradeweb.

Up to June 1, the treasury has already raised 56% of a total planned issuance of €86 billion ($107.6 billion). Analysts at JPMorgan said Monday the banking aid deal may unnerve foreign investors by giving EU lenders full seniority over private-sector creditors.

 
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