Downgraded Spain rumored to ask for bank bailout

[Rey Nuevo]

The trading week passed amid news of Spain struggling to prop up its ailing banks without asking for external bailout, of EU leaders trying to reach an agreement on the EU banking union and increasing international officials pressuring them take firmer actions to overcome the crisis in the area.

 

But despite efforts the economic gloom has rather thickened on Friday, following Fitch's announcement of Spain's credit rating downgrade and the resulting Spanish local and regional government rating cuts.

 

Also, there were reports on Friday that Spain would ask for funds to bailout its distressed banks at a EU finance ministers' videoconference which would take place on Saturday. Nevertheless, the Spanish government and ECB officials denied the rumors.

 

Fitch slaps Spain to BBB and slashes ratings of 11 Spanish local and regional governments

 

Fitch Ratings downgraded the long-term debt of Spain by 3 notches to BBB from A, with negative outlook, the agency said in a statement Thursday. "Spain is forecast to remain in recession through the remainder of this year and 2013," says the paper and Fitch adds that in line with new expectations, Spanish government debt would like "to peak at 95% of GDP in 2015."

 

According to Fitch, the downgrade of Spain's sovereign ratings reflects that the likely fiscal cost of restructuring and recapitalizing the Spanish banking sector estimation has increased to €60- €90 billion, or 6-9% of GDP, from €30 billion, or 3% of the GDP, previously estimated.

 

Spain will be in recession throughout the rest of 2012 and 2013 against a mild recovery in 2013 previously estimated. As said in the Statement, Fitch believes Spain's high level of foreign indebtedness "has rendered it especially vulnerable to contagion from the ongoing crisis in Greece."

 

According to Fitch, the absence of a credible vision of a reformed EMU and financial 'firewall' has rendered Spain and other so-called peripheral nations vulnerable to capital flight and undercut their access to affordable fiscal funding. "Gross general government debt (GGGD) is projected by Fitch to peak at 95% of GDP in 2015 assuming a EUR60bn bank recapitalization, compared to Fitch's forecast at the beginning of the year of 82% by the end of 2013."

 

After downgrading Spain by three notches to BBB from A on Thursday the rating agency announced on Friday that it has also cut the rating of 11 Spanish local and regional governments and five credit linked PSEs (public sector entities).

 

In the official release Fitch explains that its latest rating action was a consequence of the earlier downgrade of Spain as the agency's criteria say that “subnationals' ratings cannot be higher than the sovereign.”

 

The publication also states that: “The downgrade of the Basque Country, the Three Basque provinces, the City of San Sebastian and the Basque Transport Consortium reflects that they have exceeded the maximum leeway/headroom for a subnational rating above the sovereign of three notches.”

 

Bernanke join Obama to press Euro-leaders for immediate solutions

 

In his testify to the Economic Committee in the US Congress, Fed Chairman Ben Bernanke commented that despite the US economy has been working relative well in the last months, there is "significant risks" to the U.S. recovery from Europe's debt crisis.

 

Bernanke believes that European leaders are taking the world into disaster due "their inactivity." Adding more pressure over euro officials after president Obama has been driving talks with Germany, Italy and Britain heads claiming for a immediate solution for the crisis.

 

“The situation in Europe poses significant risks to the US financial system and economy and must be monitored closely,” said the Fed Chairman. “As always, the Federal Reserve remains prepared to take action as needed.”

 

EU & Germany discuss limited Spanish bailout

 

Efforts to solve this basket case called European debt crisis continue. According to a FT report, Euro officials are considering a bailout to aid Spanish banks that unlikely loans to Greece, Ireland and Portugal, would require few austerity measures beyond reforms already agreed with the EU.

 

Germany and the European Union officials are exploring options to rescue Spain's banking sector even though Madrid has not yet requested assistance and resists to be placed under international supervision. "EU officials are also debating the size of the loans needed. Senior Spanish banking executives have put the figure at about €40bn, but EU officials have been looking at plans that are at least double that", according to FT report.

 

This bailout that would impose "very limited conditionality" on Spain and could even dispense with the close monitoring by international lenders, which could make the government more willing to accept international assistance. EU support would instead be contingent on increased external oversight and accelerated restructuring of the Spanish financial sector.

 

U.S president Barack Obama has been in talks with UK James Cameron, Germany Angela Merkel and Italy Mario Monti during the whole day pressing for new and immediate measures to solve the European crisis.

 

EU presents banking union proposal

 

The European Commission unveiled on Wednesday its plans of tightening the legislation for the troubled EU banking sector.

 

The plan anticipates a tighter coordination between EU Member States through the creation of a single financial regulator and the possibility of imposing losses on holders of bonds of collapsing banks.

 

New regulations are supposed to be implemented by 2015, which means that they will not play a role in solving the current European debt crisis.

 

Members of German Chancellor Angela Merkel's coalition reacted to the announcement with disapproval, suggesting that the European Comission's proposal is just another attempt to tap German solvency.

 

Spain acknowledges it needs bank aid

 

Spain is asking for help. Spanish Treasury Minister Cristobal Montoro said in a radio interview on Tuesday that the high risk premium on Spanish bonds is keeping the country away from bond markets, which prevents Spain from refinancing its debt.

 

The spread between Spanish and German 10-year bonds hit a euro area record of 548 basis points last Friday. Ergo, Spain "does not have the door to the markets open," and it is a concern given that The Spanish treasury plans to auction up to €2 billion of bonds on Thursday.

 

Montoro assured that the recapitalization of Spanish banks does not require excessive funds and he urged EU institutions to help Spain obtain them. The Treasury Minister also stood by the Spanish government's opinion that the country will not need a bailout and that it is necessary to form a banking union in the EU.

 

Later in the afternoon, Spain's Prime Minister Mariano Rajoy said, in a parliamentary debate, the European Union needs to send a clear message about the irreversibility of the euro by reinforcing integration and creating a common banking union and euro zone bonds.

Rajoy said Spain is in situation of "extreme difficulty" and that Europe needs to help with liquidity issues.

 

G7 to join forces and monitor eurozone crisis closely

 

The G7 meeting has "agreed to monitor developments closely ahead of the G-20 summit in Los Cabos," affirmed the U.S. Treasury Department on a press statement published Tuesday after the conference call held between finance ministers and central bank governors of the seven stronger economies around the world.

 

"The G-7 Ministers and Governors reviewed developments in the global economy and financial markets and the policy response under consideration including the progress towards financial and fiscal union in Europe. They agreed to monitor developments closely ahead of the G-20 summit in Los Cabos."

 

Japanese Finance Minister Azumi said G7 countries have decided during the teleconference to tighten cooperation in order to quell the EU debt crisis. According to Azumi, the recent decline in Japanese stock market prices and rise of yen "are hurting the country's economy" and that the Group of Seven agreed to cooperate to "prevent extreme FX moves."

 

No joint official statement will be issued, which inclines Kathy Lien, Director of Currency Research for GFT, to describe the G7 meeting as a “a complete disappointment.” The expert adds that: “Their lips are sealed which tells us that they are either working on something big or failed to reach an agreement.”

 

Kathy Lien also hopes that officials at the upcoming G20 meeting “will announce greater support either from Europe internally and/or the IMF.”

by FXstreet.com Team