Will Spain need a bailout too? Maley

Global financial markets were again rattled overnight on fears that Spanish banks are struggling to raise funding, and the country could soon be forced to request a Greece-style emergency bailout package.

According to the French newspaper, Le Monde, Spain’s Treasury secretary, Carlos Ocana, strongly denied rumours that Spain was negotiating for a bailout package overnight, saying that Spain did not need any additional financing from international institutions.

However, Ocana did concede that some Spanish banks were being refused loans in the international inter-banking market.”It’s definitely a problem”, he said. “The way to restore confidence is to introduce resolute and concrete measures”.

Worries about a Spanish debt crisis were also fuelled by comments from Francisco Gonzalez, chairman of Spain’s second largest banks, BBVA, who said that Spanish sovereign debt worries were impacting private borrowers. “For the majority of companies and financial institutions in Spain, the international financial markets are closed,” he said.

Concerns over the Spanish banking system have been simmering since last month when the Bank of Spain took control of CajaSur, a small Spanish savings bank which was controlled by the Catholic Church. This drew attention to the precarious financial state of other Spanish savings banks, many of which are heavily exposed to the ailing Spanish property market.

And markets are likely to stay on edge in coming weeks, as they wait to see whether Spain can raise the $US20 billion it needs to refinance debt that matures next month.

Increased jitters over Spain’s financing problems have come at a time when relations between the two most important eurozone economies – Germany and France – appear to be deteriorating.

German Chancellor Angela Merkel and French President Nicolas Sarkozy met overnight in a bid to hammer out a joint approach to eurozone debt crisis.

The two leaders were scheduled to meet last week, but the last minute cancellation of the high-profile tet-a-tet fanned speculation that the relationship between the two leaders was strained because of their deep divisions over the best way to resolve the eurozone debt problems.

France is pressing strongly for a common European economic government for the 16 eurozone countries, which would have its own administration.

Germany is deeply opposed to introducing a new layer of administration. Instead, it wants eurozone members to introduce tough austerity programs to reduce budget deficits, and it has proposed that countries that fail to get their budget deficits under control should be penalised, and perhaps even be expelled from the eurozone, an idea that France is resisting.

Spain is the fourth largest economy in the eurozone, and any problems in Spain would quickly impact France and Germany.

According to the latest report from the Bank for International Settlements, French banks have $248 billion in exposures to Spain, while the exposure of German banks is $202 billion. The French banks are heavy lenders to Spanish non-bank companies, while more than half of German bank loans were to Spanish banks.

Concerns over Spanish debt also overshadowed figures that showed eurozone industrial production grew for the 11th consecutive month in April, with year-on-year growth rising to 9.5%. But the growth was concentrated in the stronger economies. Greece’s industrial output has dropped 6.4% in the past year, while Ireland, Portugal and Spain still have lower output than a year ago.

Spain has previously argued that its debt is not a problem, as government debt only accounts for around 55 per cent of the country’s GDP, compared with more than 115% for Greece.

In addition, the Spanish government has introduced additional austerity measures to reduce the budget deficit by a further $18.3 billion and has proposed measures to reform the country’s labour markets.

This article first appeared on Business Spectator.