Borg Says Spain Needs EU Bank Bailout Not Fiscal Overhaul
“This is not a fiscal basket case, it’s a country with a problem in its banking sector, so let’s try and help them out on that issue,” Borg told reporters today at an Institute of International Finance conference in Copenhagen. Spain doesn’t need a broad rescue package like those received by Greece, Portugal and Ireland, which were predicated on extensive budgetary and economic changes, he said.
Spain is on track to narrow its deficit next year as it reins in its debt and makes structural economic reforms, he said. The 17-nation euro zone needs to figure out the most practical way to stabilize Spain’s bank industry, he said.
The country is struggling to avoid a bailout as it buckles under an undercapitalized banking system, rising borrowing costs and a shrinking economy. Officials inside the currency union remain divided on how to support Spain as it risks destabilizing the area already under threat from a potential Greek exit.
Norwegian Finance Minister Sigbjoern Johnsen today also urged policy makers to build “a stronger defense” around the lenders.
“From Norway’s perspective it is important that they manage to build stronger solidity and increased market confidence because Norway is affected via funding costs for Norwegian banks when uncertainty increases,” he said in an interview at the same conference in Copenhagen. Norway isn’t a member of the European Union, while Sweden has opted out of the euro.
Spain today sold 2.07 billion euros ($2.6 billion) of bonds, meeting its maximum target. The sale came two days after Budget Minister Cristobal Montoro said the “door of the markets isn’t open to Spain” as he called for European institutions to help the nation shore up its lenders.
Borg reiterated his view that the European Stability Mechanism, the euro area’s 500 billion-euro permanent rescue fund, ought to be able to lend directly to banks when it comes online this summer. Other mechanisms for aiding Spain might come through some other kind of EU aid program or via the International Monetary Fund, he said.
Spain’s banks need to be independently assessed with a “tough” view toward how to absorb losses and shore up capital, Borg said. During the panel discussion, he said equity holders and other bank owners may need to take a “nasty haircut” as part of restoring banks to health.
Bondholder losses should be viewed with much more caution, he said. Imposing losses on investors who lend to banks could further damage banking sector liquidity, which has been “very, very fragile,” he said.
A debt restructuring like the “private sector involvement” for Greek bond holders should not be copied for other countries, Borg said.
Efforts to move toward “banking union,” as proposed in recent days by European Central Bank President Mario Draghi and other policy makers, probably will need to be contained to the euro area, Borg said. Sweden might back broader proposals that included all 27 EU nations, an initiative that is theoretical for now because of U.K. opposition, he said.
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