Spain tempts fate with minimalist bank rescue

Elena Salgado, the Spanish Economy Minister, said the country's savings banks have seven months to boost capital through private investors or the state will partially take them over. 

Finance minister Elena Salgado said capital injections into the cajas would “in no way exceed €20bn [£17bn]”, with a large part coming from the private sector. Spanish banks will have to boost their core Tier 1 capital ratio to 8pc, even stricter than the Basel III rules.

“This is unlikely to be a game-changer, and could potentially unwind the relief rally we have seen in the markets,” said Silvio Peruzzo, RBS’s Europe economist.

“We view €50bn as the minimum recapitalisation for the Spanish banking system that would restore investors’ confidence,” said the bank.

RBS said Spain remains caught in a vice of tightening fiscal policy and a deepening property slump that may culminate in a 40pc fall in house prices, eroding the solvency of the cajas. The Madrid consultants RR de Acuna estimate the overhang of unsold homes at 1.2m.

Mr Peruzzo called on EU leaders to take much bolder action to overcome the crisis, demonstrating that they really mean to “save Spain” by beefing up the rescue machinery. EU ministers played for time at a key meeting last week, giving an impression of complacency.

A report by RBS said the real firepower of the EU’s €440bn bail-out fund must be greatly increased to cope with the risk of a full-blown Iberian crisis. The fund should be allowed to buy Spanish and other eurozone bonds pre-emptively, and recapitalise banks.

EU leaders are starting to recognise that the sort of loan packages provided to Greece and Ireland are no answer to a solvency crisis caused by excess debt, but have not yet agreed to a formula that allows these economies to claw their way back to health.

RBS said there is a risk that new proposals in the pipeline will not be “forceful enough” to mark a turning point in the eurozone drama. It said Spain “will remain exposed to contagion”, unless the EU takes pre-emptive action.

Goldman Sachs takes a rosier view, deeming Spain to be fundamentally “solvent”. It estimates further caja losses at €15bn. Even if Spain slips into a double-dip recession this year under a “pessimistic scenario”, public debt will peak below 90pc of GDP. Exports are recovering, with car shipments at record highs.

Analysts are split over the true state of the cajas. Arturo de Frias at Evolution Securities said parts of Spain’s banking system look “Irish”. The “problem ratio” on €439bn of property debt may reach 60pc. “We calculate a worst case of €142bn future impairments – €59bn for banks, and €83bn for the Cajas,” he said.

Brussels clearly fears that Spain is still at risk. Olli Rehn, the EU’s economics commissioner, called for urgent action to beef up the rescue fund (EFSF) before the next spasm of debt jitters. “We need to agree as quickly as possible. The recent lull in market tensions gives us breathing room, but we can’t sit back: we must act now with full determination,” he told Die Welt.

Mr Rehn said EU leaders must redesign the bail-out fund so that it can lend a full €440bn. “If you buy a Mercedes with 440 horsepower, you want all 440 horsepower,” he said.

The EFSF has a lending limit near €250bn owing to the need for extra collateral to anchor its AAA rating. EU experts are exploring ways to boost the total without needing fresh money from member states, which would entail a Bundestag vote at a bad moment before regional elections.

They have support from German finance minister Wolfgang Schauble, who said the EU cannot keep “stumbling from one crisis to the next”. But the Free Democrats (FDP) and Bavaria’s Social Christians are still dragging their feet within the ruling coalition.

Guido Westerwelle, the FDP leader, has sounded euro sceptic over recent weeks, accusing EU officials of trying to bounce Germany into signing a blank cheque for a “Transferunion”, arguably in breach of both German and EU treaty law. He admonished EU officials for their “ex-cathedra” demands, reminding them that the rescue fund remains the prerogative of the member states that pay for it.

“It bothers me that some in Europe seem to think nothing has happened in this financial crisis, and think they can solve the problem by taking on fresh debt,” he said, invoking the name of Ludwig Erhard, the free-market apostle who created the foundations of the post-war German miracle.

Jean-Claude Juncker, head of the Eurogroup, said the FDP’s new tone is alarming. “I am appalled by how some German liberals are compromising their European political heritage. It is deeply painful for me to see that some in the FDP are now flirting with a populist course regarding Europe,” he told Spiegel.

Mr Juncker said icily that Germany was not the only country in Europe with a AAA-rating and is not the only contributor to the EU bail-outs. “We could criticise the Greeks, Portuguese and others more credibly if Germany and France hadn’t violated the Stability Pact on purpose in 2003,” he said.

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