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23rd Jan 2022

Spain: ECB cash more important than euro-plans

  • Police guard bank machine during recent street protests in Spain (Photo: Popicinio-01)

Spanish Prime Minister Mariano Rajoy early on Thursday (24 May) called on the European Central Bank (ECB) to help lower his country's borrowing costs as a matter of urgency.

He said the bank problem is more important than the plans for an economic union brainstormed by EU leaders at a late-night dinner in Brussels, which ended up tasking EU Council chief Herman Van Rompuy with drawing up a long-term plan.

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"What I am saying is commonsensical: all efforts are important and good, we have to make them in order to improve the economy. But one thing is essential: if the public debt is unsustainable, then we have a problem," Rajoy said on his way out of the summit.

"I respect the ECB's independence, but this to me seems much more important than the topic of the future of the European Union. I insist it is up to the ECB to take this decision that it has already taken in the past."

Rajoy was referring to an ECB bond-purchasing programme and €1 trillion worth of cheap loans which in the past six months have helped Spain and Italy lower their bond yields.

Madrid's borrowing costs in recent weeks peaked again at 6.5 percent while Germany's bonds sold at a record zero percent interest rate on Wednesday.

ECB chief Mario Draghi, who also took part in the EU dinner, brushed off the demands for easy cash, however.

"This liquidity could be provided by other sources as well," Draghi said on his way out.

Part of Spain's problem is investors' fears that if Greece exits the euro after 17 June elections the event will "contaminate" other southern countries.

Another problem is a mushrooming state deficit - almost 9 percent for 2011 - due to regional spending all but out of Madrid's control. Several regions have now been downgraded to "junk" status, meaning they cannot borrow from markets and rely on only state funding.

High unemployment, recession and cash-strapped private banks are also aggravating factors.

On Wednesday, the government announced it will have to pump €9 billion to bail out Bankia, the country's fourth-biggest lender, after nationalising it earlier on. The bank has at least €32 billion worth of bad loans or "toxic assets."

According to the Institute of International Finance (IIF) - an umbrella group of the world's largest banks and investment funds - Spain's bank losses could hit €260 billion in a worst-case scenario.

The Spanish government recently passed a banking reform asking lenders to boost their capital by an extra €30 billion to protect them against bad loans. This comes on top of the €54 billion mandatory capital demanded earlier this year. If banks cannot find the money, they will have to take government loans at a 10 percent interest rate.

The banking troubles have already prompted foreign investors to remove capital on a large scale.

According to the country's central bank, some €31 billion were withdrawn from Spanish banks in March alone.

Spain hit by downgrades amid Greek contagion fears

Spain's economic woes deepened on Thursday as 16 of its banks and four regions were downgraded by Moody's, while statistics confirmed the country is still in recession, just as fears about a Greek euro-exit are running high.

Van Rompuy to draft plan for deeper economic union

EU leaders have tasked council chief Van Rompuy with drafting a plan on deepening the eurozone's economic union. A similar report was issued in 2010, leading to tougher sanctions for deficit sinners.

Spain may speed up EU 'banking union'

The US has joined ranks with EU officials exploring ways to pump eurozone money directly into Spain's troubled banks, with creation of a "banking union" now considered a matter of eurozone survival.

Spanish and Italian borrowing costs soar

The cost of insurance against a Spanish default reached another record on Monday, with Italy's borrowing costs also rising sharply amid market fears about the eurozone.

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