The cost of providing an Irish-style bailout for Spain would almost empty the emergency fund that was set up by the European Union and the International Monetary Fund to deal with the crisis affecting weak members of the monetary union, a leading team of analysts warned last week.
Amid growing fears that pressure on Portugal will be followed by financial trouble for its Iberian neighbour, Capital Economics said the price tag for a rescue providing the equivalent funding security offered to Greece and Ireland would be a “whopping €420-billion”.
Jennifer McKeown, Capital’s senior European economist, said there was a total of €660-billion available from the EU and the IMF, of which Ireland was due to get €80- to 90-billion.
“If we knock off the similar amount that might be required to meet Portugal’s needs, we are left with just €490-billion. That suggests that Spain’s needs could barely be met by current arrangements.”
McKeown said the risk of a Spanish bailout was still fairly low, even though the country’s borrowing costs rose this week to their highest level since the creation of the single currency more than a decade ago. But should Spain require help, the cost would be “devastatingly high”.
Spain is the fourth-biggest economy in the eurozone and, like Ireland, has seen public borrowing spiral following the collapse of bubbles in its housing and construction sectors. A decade of cheap and ample credit led to a spending spree in the construction industry, which once accounted, directly and indirectly, for about one quarter of the economy. Local and regional authorities spent billions in public sector works, including new airports and motorways throughout the country, or local developments.
House prices drop
Although regulations on Spain’s banks were tight during the boom years, some analysts fear that a 40% drop in house prices from their peak, coupled with an increase in unemployment to 20%, is putting too much pressure on lenders.
Although interest rates on Spanish bonds have so far risen far less than in Greece, Ireland and Portugal, there were the first real signs of jitters among investors this week.
The premium demanded by bond investors to buy Spanish bonds over rock-solid German bunds rose to 233 basis points — 2,33 percentage points. Madrid now needs to pay as much as 4.9% to sell 10-year bonds to investors, not far from the 5.5% offered by the European emergency fund for countries that can’t fund themselves in the market. Ireland, which is preparing a rescue package, needs to pay 8,6% to borrow from international investors, whereas Portugal, also the focus of market jitters, needs a rate of 7%.
“Markets feel they can push Spain and Portugal further in terms of asking for more clarity, more visibility, more transparency,” said Ashok Shah, the chief investment officer at London & Capital investment managers. “They will be pushing until they do what you ask them — until they get support from the European Central Bank or the International Monetary Fund. There’s no other way.”
The Spanish government has reiterated that its deficit-cutting plan is on track and there was good demand for its bonds. Spain sold €3,2-billion of short-term debt instruments, although that was less than the maximum target. The treasury also had to offer 2,1% interest on six-month bills — nearly double the 1,2% paid on October 26.
Borrowing costs have risen in high-deficit countries after Ireland agreed to a bailout this week, dashing hopes that support provided by Europe and the IMF would calm fears of contagion affecting other weaker members of the eurozone. “The second domino in the eurozone has fallen — and it probably won’t be the last,” said Steven Barrow, a strategist at Standard Bank.
Investors claim that, whereas big Spanish banks such as Santander or BBVA are well capitalised and diversified, the smaller, regional, non-profit cajas (small banks) are holding billions of euros of unrecognised losses. An audit of Cajasur, a savings bank owned by the Catholic Church that was bailed out earlier this year, revealed losses of €852-million to August — four times more than the losses to June Âpresented in the accounts.
“The non-performing loans from real estate and the construction sector have not been fully dealt with. They are still held at par value at the balance sheet,” said Shah of London & Capital. “And since the economy is struggling, this implies bad debts won’t become good.”
Investors also fear more bad news from local and regional authorities, whose debt levels are not always included in the country’s total. Last week the city of Madrid was denied permission to refinance some of its staggering €7-billion of debt. — Guardian