Spain defends bank rescue as borrowing costs rise

By Alan Clendenning

Associated Press

Published: Wednesday, June 13 2012 6:20 a.m. MDT

Spain's Prime Minister Mariano Rajoy speaks during a control session at the Spanish Parliament, in Madrid, Wednesday, June 13, 2012. The interest rate Spain would have to pay to raise money on the world's bond markets continued to rise Wednesday amid worries that a planned bank bailout might not be enough to save the country from needing an overall financial rescue.

Daniel Ochoa de Olza, Associated Press

MADRID — Spanish Prime Minister Mariano Rajoy defended his government's attempts to shore up the country's hurting financial sector, saying the nation's banks wouldn't be in such terrible shape if politicians had dealt with the problem three years ago after the eurozone was first plunged into economic chaos.

Addressing politicians in a Parliamentary debate on the offer of loan lifeline of up to €100 billion ($125 billion) from the 17 countries that use the euro — and the lack of a definite plan from the government on how much money it will ask for — Rajoy insisted the nation's banks wouldn't be in such a terrible shape if the previous Socialist administration had dealt with the problem three years ago.

"Spain doesn't have the €100 billion and it can't issue public debt," Rajoy said. "In 2009 it could have, but since we (were told we) had the best financial system in the world, now we're lagging three years behind" other European countries that did so in the wake of the 2008 financial collapse, including Britain, France and Germany.

Rajoy blamed then-governing Socialists for refusing to acknowledge Spain's banks were vulnerable to a property boom that went bust, forcing him and his administration to seek the €100 billion loan facility. The interest rate Spain must now pay for 10-year bonds is now at a punishingly high rate of 6.63 percent, meaning the country can't afford to borrow and do the job on its own, Rajoy told parliament.

There has been growing concern that as the country finds fewer and fewer international buyers for its bonds, an increasingly large amount of Spanish government debt is being bought by its banks. As Spain's banks continue to struggle, weighed down by their toxic property loans and assets, the government is finding it harder to sell its bonds.

One hope among eurozone politicians is that the €100 billion loan facility will help shore up Spanish banks' balance sheets, thereby giving them back the freedom to loan out money to businesses and individuals — and also buy more government debt. However, Spain is in danger of being trapped in a vicious debt circle. The €100 billion loan facility will increase the Spanish government's debt load and it will have to find more buyers for its bonds — which could send borrowing costs even higher.

Rajoy didn't offer details about how the bank bailout plan will work except to say that banks will pay back the money they receive, but Spain's El Mundo newspaper reported that the loans to the government will last 15 years at 3 percent with repayments to begin no later than 2017. El Mundo cited unnamed sources familiar with the negotiations, and Spain's Economy Ministry declined comment on the report.

Rajoy also released a letter Wednesday sent by him to top eurozone leaders just before Spain asked for the bailout last weekend. In it he pleads with European Union leaders to push the European Central Bank to restart a program of Spanish bond purchases that helped ease the country's borrowing rate last fall.

The letter, sent June 6 to European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, said Spanish companies and households desperately "need access to liquidity. This is impossible if doubts persist about the sustainability of the debt of sovereign states."

It's unclear what impact if any the letter would have, because the ECB is legally independent and forbidden by treaty to take instructions from politicians. The ECB's suspended program of bond purchases was limited in size and duration and aimed at ensuring more uniform interest rates in the eurozone — not at supporting Spain's ability to borrow.

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