However, that still leaves the banks. He estimates Spanish banks may need as much as 80 billion euros of extra capital once all bad mortgage debt is accounted for. In a paper published this week, Daniel Gros and Cinzia Alcidi of the Centre for European Policy Studies estimated that the total accumulated overhang in the Spanish property and construction sector is more than billion euros - equivalent to 37 percent of GDP.
The government is unlikely to fund such an operation while it is trying to slash the budget deficit, and private investors are reluctant to invest in such a troubled sector. While not at the record highs seen a few weeks ago, the rise shows the market is nervous over Spain's ability to repay debt. And where Spain goes, Italy follows.
Italian bond yields were also higher overnight, climbing 11 basis points to 5. For now, it is almost an inevitability that Spain will have to seek a full bailout. The only question is when. We probably won't have to wait too long before Rajoy goes cap in hand to Brussels for a second time.
Any request is likely to come in the next few weeks, but with the permanent bailout fund still not in place, Rajoy may have to settle for funding from the bloc's temporary bailout fund, the European Financial Stability Facility. Before he makes his decision, Rajoy will be eyeing next week's ECB meeting, where a decision on measures to aid indebted eurozone countries will be made. The markets will be hoping that the ECB steps in to reduce borrowing costs by buying up bonds off struggling countries.
Earlier this month, ECB President Mario Draghi confirmed that the central bank may resort to buying government bonds as a means of reducing borrowing costs for countries including Spain and Italy. But the proposal has received much criticism, most notably from the German Bundesbank who view the proposal as reckless. So onerous is the task of finding a solution for Draghi, that he has declined to attend the most important event of the year for central bankers, the Jackson Hole summit in Wyoming.
He would have received no end of advice on what his options were there. But some kind of intervention is required soon. If not, Spain and Italy's borrowing costs will continue to rise to unsustainable levels, causing more risk for the zone. There are comments posted so far. If you'd like to join this conversation, please login or sign up here. Our Story. How do you say 'bailout' in Spanish?
A request for assistance by Spain's largest region, Catalonia, is prompting fears that Spain will need a full bailout. That has driven interest rate yields back to dangerous levels. Share this article. Free Membership. Join Eureka Report today. Thank you. From www. LONDON, June 29 IFR - German lenders will be among the biggest beneficiaries of a Spanish bank bailout, with rescue funds helping to ensure they get paid back in full for poor lending decisions made in the run-up to the financial crisis, and helping politicians in Berlin avoid a politically sensitive bank bailout of their own.
Spanish banks borrowed heavily to finance a property boom, and still owe their German peers more than 40 billion euros, according to the Bank for International Settlements. German banks were facing deep losses linked to potential Spanish bank failures. If lenders in Spain were allowed to default, the consequences for the German banking system would be very serious. Last night European leaders agreed to allow the ESM to lend directly to banks for recapitalisation purposes.
In no way is this a bailout. But even as late as Friday afternoon, his government was insisting it would not request that assistance until it had the results of three audits, one from the IMF, due Monday, and two from independent evaluators, due later this month. Yet the rest of Europe was unwilling to wait that long. Potentially destabilizing Greek elections are scheduled for June
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