Spanish bank debt contingency plan under discussion

GERMANY HAS refused to discuss reports that talks are under way to refinance Spain’s banks without Madrid applying for a full-blown euro zone bailout.

Reports of just such a contingency plan came amid signals that Berlin is ready to consider euro zone funding alternatives to jointly issued eurobonds.

According to the Süddeutsche Zeitung daily, European officials are examining the possibility of paying bailout funds directly to the Spanish banking rescue fund rather than to the Spanish government.

In exchange, Madrid would promise to solve problems in the country’s banking sector – if needs be by merging or closing individual operators.

Officials are examining whether lending to the Spanish banking rescue fund would get around the explicit bailout ban on lending to financial institutions.

Madrid has admitted it is effectively shut out of funding markets but is anxious to avoid a bailout, which comes with a loss of budgetary sovereignty and the strict conditionality of an EU/IMF reform programme.

In public, Berlin officials stuck to the official German line yesterday that only the Spanish government was entitled to apply for external financial assistance, either through the current, temporary (EFSF) bailout fund or its permanent successor (ESM).

Volker Kauder, Bundestag leader of the Christian Democrats (CDU), said yesterday Spain would have to accept a bailout because of its banks.

“As soon as we discuss what might or might not be discussed regarding Spain we would give the impression that something is being worked on and that is not an impression we want to give,” said a German government spokesman yesterday.

Off the record, government advisers said they were still waiting for a signal from Spain over how much money its banks needed. Only then could they decide if existing rules were suitable for the funding required.

“We’ll cross that bridge when we come to it,” said one Berlin official.

Unnamed German officials told Reuters that contingency plans were under way, with lawyers studying treaties for ways to provide funding without a full-on programme.

Spain has requested a full audit of its financial sector, with results expected in two weeks. External estimates of capital requirements have ranged from €30 billion to €100 billion.

Spanish economics minister Luis de Guindos, in Brussels yesterday for talks at the European Commission, said Madrid had no plans to apply for a bailout.

British prime minister David Cameron is expected to raise the issue with chancellor Angela Merkel when he travels to Berlin today. Mr Cameron is expected to pass on to the German leader the central message of a phone call he had yesterday with US president Barack Obama on “an immediate plan for the solution of the crisis and restoration of market trust”.

Chancellor Merkel has always resisted such pressure, insisting there are no “quick fixes” for the euro zone crisis, caused by problems that built up over years.

A British government spokesman indicated that Mr Cameron would be raising the issue of eurobonds – mutual sovereign debt – a topic little loved by the German leader.

As an alternative, German opposition politicians said yesterday Dr Merkel appeared willing to look again at an idea she rejected last year – of a euro zone debt redemption fund.

Germany’s economic “wise men”, a group that advises the government, proposed granting euro zone members low interest loans from a €2,300 billion fund in exchange for signing up to a strict repayment plan.

In return for such a plan, loan applications would be made to help bring applicant countries’ national debt to 60 per cent of GDP.