Salgado Backs Easing Greek Terms as EU Mulls Crisis Tools

Spain's Finance Minister Elena Salgado
Elena Salgado, Spain's finance minister. Photographer: Jock Fistick/Bloomberg

Spain favors giving Greece “more flexibility” on rescue loans as European leaders wrangle over an agreement on bolstering the region’s crisis tools, Finance Minister Elena Salgado said.

Spain supports considering “different formulas” for the Greek loan to ease the interest-rate burden as the country steps up austerity measures, Salgado said in an interview in Madrid yesterday. Terms should be “re-examined” as they’re “the same when the country is bearing the impact of the austerity measures as when those measures will be easing” in two or three years.

German Chancellor Angela Merkel has increased her resistance to cutting rates on bailout loans while European leaders are still seeking to reach a consensus on boosting the firepower of the region’s 440 billion-euro ($613 billion) rescue fund. Officials have set a March 25 deadline to come up with fresh measures to help restore investor confidence.

“Talking about moral hazard in the case of Greece seems to me very tough,” Salgado, 61, said. “Aid is only given under very strict conditionality and that’s what avoids moral hazard.”

Spain wants to see the fund’s effective lending capacity increased to the full complement of 440 billion euros, and expects officials to reach an agreement to do so this month, Salgado said. Governments may need more time to decide whether the European Financial Stability Facility should also be allowed to purchase government bonds, she said.

“The more instruments we have to support the euro the better,” Salgado said.

Bank Rules

The gap between Spanish and German borrowing costs widened today for the first time this week, increasing to 212 basis points from 208 basis points yesterday. That compares with a euro-era record of 298 basis points on Nov. 30 and an average of 15 basis points in the euro’s first decade. The spread between Spanish and Portuguese yields is 206 basis points.

Spain is stepping up efforts to distance itself from other so-called peripheral nations including Portugal, whose borrowing costs have surged on investor concern that the country will become the third euro nation to require external aid after Greece and Ireland. Spain isn’t “contemplating” the possibility of Portugal asking for support, Salgado said.

Capital Raising

The Bank of Spain will tell lenders on March 10 how much capital they need to raise to avoid partial nationalization. The new rules set a minimum requirement for core capital, a measure of financial strength, of 8 percent, rising to 10 percent for lenders that don’t have private shareholders holding at least 20 percent of their shares and that depend on wholesale financing.

The rules, first laid out in January, have spurred a flurry of activity among non-traded savings banks as they announced plans to raise capital with stock listings and asset sales.

The prospect that savings banks will have to sell shares at a discount is a price they may have to pay to benefit from the looser capital rules that apply to lenders with listed shares, according to Salgado.

“This is the trade-off,” she said. “Because the time periods that have been imposed are short, maybe they will have to accept valuations that maybe in a few years would be greater.”

Salgado also said the “worst has passed” for the country’s property market. The “default rates on mortgages remain very low,” she said. Bank of Spain figures show the default rate on mortgages at about 2.5 percent compared with more than 5.8 percent for lending across the banking industry.

It may be too early for Salgado to play down the issue of mortgage defaults at a time when unemployment is exceeding 20 percent and borrowing costs are set to increase, said Luis Garicano, a professor at the London School of Economics. “I hope she’s right but there are real uncertainties.”

European Central Bank President Jean-Claude Trichet said yesterday the central bank may raise interest rates next month to fight inflation. About nine out ten mortgages in Spain are linked to changes of interest rates and the country has more than 600 billion euros in outstanding home-mortgage loans.

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