Full-Force Bank Aid Is Spain’s Only Hope, Industry Warns

EU’s Financial Services Chief Michel Barnier
Michel Barnier, financial services commissioner for the European Union (EU). Barnier said the plans, which include setting up a network of national bank-financed funds to stabilize crisis-hit lenders, are a necessary step to curb excessive risk taking and to shield taxpayers from the cost of bailouts. Photographer: Jock Fistick/Bloomberg

Spain’s banks need urgent aid plugged directly into their balance sheets and Europe can no longer allow itself to deploy half measures, according to the leaders of some of the world’s biggest banking and finance groups.

“It must be done with full magnitude,” Christian Clausen, the president of the European Banking Federation and chief executive officer of Nordea Bank AB, said in an interview in Copenhagen yesterday. Recapitalizing Spain’s banks has become the key hurdle that European policy makers need to overcome, and fixing the turmoil in the nation’s financial system would calm markets, he said.

Bankers are stepping up their pleas for action as Spain’s financial crisis risks engulfing the euro area’s fourth-largest economy and policy makers remain divided on how best to tackle the issue. The European Commission last month lent its support to proposals to provide a direct capital infusion to Spain’s banks, a model Germany opposes in favor of aid with fiscal austerity strings attached.

Spain’s banks are buckling under the weight of 184 billion euros ($231 billion) in real estate loans that the Economy Ministry has characterized as “problematic.” The country’s lenders may need as much as 100 billion euros in support, Antonio Lopez Isturiz, a leader of the European People’s Party, said yesterday in an interview with broadcaster TVE.

‘Spill Over’

Norway’s Finance Minister added his voice to the request for action as the world’s second-richest nation per capita after Luxembourg warns failure to act will threaten financial stability in its markets.

“It is important that they now manage to build a stronger defense around the banks,” Finance Minister Sigbjoern Johnsen said in an interview in Copenhagen yesterday. “Problems in one country quickly spill over into other countries. Norway is affected via funding costs for Norwegian banks when uncertainty increases.”

Fitch Ratings downgraded Spain three levels late yesterday to within two steps of junk as it increased its estimate for the cost to the government of shoring up banks to as much as 100 billion euros. The rating company estimates the economy will remain in recession through 2013.

Act Fast

Europe needs to act fast if it is to calm markets, said Stefan Ingves, the chairman of the Basel Committee on Banking Supervision. Recapitalizing Spain’s banks should be accompanied by a restructuring of the country’s financial system, he said.

“They are going to have to do it one way or the other,” Ingves said in response to questions about recapitalization in Copenhagen yesterday, where bankers from across the globe are attending a meeting of the Institute of International Finance. “The sooner the better. That is how you make the fog lift.”

The views were backed by HSBC Holdings Plc Chairman Douglas Flint, who this week became chairman of the IIF. The group announced Charles Dallara is stepping down.

“The immediate concern is addressing bank recapitalization where the markets believe that it’s necessary and doing it in a way that people are confident that it’s being done appropriately and fairly,” Flint told reporters in Copenhagen yesterday.

A European banking union, a model being discussed as a way to coordinate regulation and deposit guarantees across borders, would be a “step in the right direction,” Clausen said. Such a model should accompany closer fiscal integration, though it’s unlikely to offer any near-term solution to Spain’s woes, he said.

Excessive Risk

European Union leaders, including European Central Bank President Mario Draghi and European Commission President Jose Barroso, have called for a banking union as lawmakers grope for ways to bolster confidence. EU President Herman Van Rompuy plans to report on proposed “building blocks” for deeper integration in the 17-nation euro area for the next summit of EU leaders on June 28 and 29 in Brussels.

The EU’s financial services chief Michel Barnier said the plans, which include setting up a network of national bank-financed funds to stabilize crisis-hit lenders, are a necessary step to curb excessive risk taking and to shield taxpayers from the cost of bailouts. Senior unsecured creditors will also be put in the firing line to cover costs from failing lenders under the EU’s plans, announced this week.

Any banking union should seek to include all 27 EU members as a starting point and individual countries would then have the freedom to opt out, Barnier said in Copenhagen yesterday.

‘Vague Concept’

Still, plans for such a model remain unclear, Ingves said.

“When you are talking about a banking union, that is a vague concept,” he said. “It doesn’t really tell us much, as far as I can judge, as to what you are supposed to do with individual banks in individual countries, and those are the types of problems people are struggling with presently.”

Under Barnier’s plans, national governments would impose annual levies on banks to ensure that a minimum amount of money, a so-called resolution fund, is immediately available to stabilize a crisis-hit lender. This would allow regulators to buy time while other steps, such as creditor writedowns, are enacted.

“In the short term, the first thing we need to do is to put out the fire” in Spain, Clausen said this week. “Recapitalizing the Spanish banks would help calm the markets.”

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