Spain bailout sufficient to recapitalise banks: StanChart
Giving her perspective on the on the effectiveness of that up to 100 billion euro bailout for Spain, Sarah Hewin, Regional Head of Research for Europe in the Global Research Department of Standard Chartered Bank that the bailout at the top end of the estimations of how much Spain banks could need for recapitalization purposes.
June 12, 2012 / 13:26 IST
Giving her perspective on the on the effectiveness of that up to 100 billion euro bailout for Spain, Sarah Hewin, Regional Head of Research for Europe in the Global Research Department of Standard Chartered Bank that the bailout at the top end of the estimations of how much Spain banks could need for recapitalization purposes.
In her opinion,"This is an unusual bailout; it is targeting just the banking sector. So other bailouts for Greece or for Portugal or for Ireland have gone to the government and they have addressed overall funding needs. Although obviously in the case of Ireland, those funding needs were pretty directly related to the banking sector."She further added that if we get a confrontational and hostile government coming to power in Greece, then 100 billion euro bailout for Spain's banks will probably need to be supplemented by additional bailout for the Spanish government and potentially some temporary bailout facility for the Italian government as well.Below is the edited transcript of the interview. Also watch the accompanying video.Q: Do you think that upto 100 billion euros will be sufficient to help plug the hold in Spain’s banking system?A: It should be more than sufficient. The 100 billion euros that the Eurogroup finance ministers have offered to Spain is really at the top end of the estimations of how much Spain banks could need for recapitalization purposes. So we are waiting to hear from independent assessors over the course of the next week or so exactly how much the banks need but the chances are that it will come in lower than 100 billion euros.Q: Do we know whether the money will come from the European stability mechanism (ESM) or the European financial stability facility (EFSF) and if that makes any difference at all? Will there be any conditionalities attached to that money? We are already hearing rumblings from Greece and other countries that have been bailed out saying we have had a bunch of conditionalities imposed on us by the Troika, Spain seems to be getting the money easy?A: This is an unusual bailout; it is targeting just the banking sector. So other bailouts for Greece or for Portugal or for Ireland have gone to the government and they have addressed overall funding needs although obviously in the case of Ireland, those funding needs were pretty directly related to the banking sector.In terms of whether the EFSF or the ESM are tapped, it depends largely on when Spain makes the formal request for funding. The European stability mechanism i.e. the permanent bailout mechanism is not yet operational. We are awaiting gratification by individual euro area governments. Although it was due to become operational from the July 1; that date is slipping. We have heard the July 9 or later on in July that finally the fund is up and running.So obviously, if it is not operational then Spain will have to access the temporary bailout mechanism the EFSF. Now there are problems associated with that, the main one being that Finland demands collateral in the event that EFSF is tapped. There could be ways around it but it is not as straightforward as accessing the ESM.The one problem about the European stability mechanism is that it has seniority over other government funding. So that would at a stroke put holders of Spanish sovereign debt at a disadvantage.Q: It is interesting that you bring up Finland because the Finish Prime Minister today seems to have suggested that the bailout money should go to good banks in Spain that have a chance of surviving and that the bad banks must all be agglomerated into a single bad bank and a way of dealing with that or selling that down should be found. So how quickly is this money going to get to Spain’s banking system, do we have a timeline at all in hand?A: We don’t have a timeline. The euro group offer over the weekend was a preemptive action largely I think to do with the fact that we have Greek elections coming up on June 17 which could promote turmoil in the markets. I think the idea was to pre-empt any particular turmoil around Spain by making it clear that European funding is available for the Spanish banks. But we need to wait for a formal request by the Spanish government that will come through once they have an understanding of exactly what the recapitalization needs are of the individual banks and that information should be coming through in the course of the next week or so._PAGEBREAK_I think that the comments from Finland are entirely justified. There is no point recapitalizing banks that a couple of years down the road are going to need further capital injections. You want to make sure that you are supporting those banks that have a good chance of surviving and thriving and banks that aren’t in a situation should indeed be merged or somehow sort of dealt with in a way that doesn’t continue to suck money out of Spanish and European funding.Q: What does this mean for Italy's banking sector, which is also under pressure? Do you think that this move made over weekend maybe in anticipation of turmoil ahead of the Greece elections will be enough to deal with such turmoil? We have seen a rise in Spanish ten year yields over the last few weeks. It has risen above 6%. We have seen yields come off in the first part of the year and they have rebounded since then. So is this up to 100 billion euro announcement going to be enough in that?A: The Italian situation is different from the Spanish one. In that, the Italian banks are on a more secure footing and the problem with Spain is the saving banks, in particular, are in need of a substantial amount of capital to survive. Italian banks have been more cautious, they don't have such problems. Having said that, the Italian government debt level is much higher than Spanish government debt. So they have high rollover requirements. It's all down to confidence of course. If markets have confidence then borrowing cost for Spain and Italy are manageable. If that confidence dissipates, it starts to become more costly and potentially more difficult for Spain and Italy to borrow on the capital markets and this is where the Greek election comes in. The results of the Greek election could have a very significant bearing on whether Spain and Italy can continue to access capital markets for government financing needs, at least in the very near-term.Q: Do you think it's the most likely scenario whichever way the Greek elections go that Greece will insist on renegotiating its bailout terms because it is unable to deal with the kind of austerity that it has had over the last several months that is dampening growth? In the face of that renegotiation of bailout this contagion and confidence issue that you talk about will not be soothed by 100-200 billion or even 300 billion euro?A: I think a lot does depend on the outcome of the election. You are right that in all likelihood whichever government comes to power, Greece has received the message from electorate that the terms of the bailouts are very onerous and that the population is struggling under austerity. So it's likely that whichever government comes to power will sit down with their euro area and the IMF creditors and coming to some sort of arrangement about where to go from here. The difference will be on whether there is a confrontation between Greece and its euro area creditors. The language we had from the left wing coalition has been quite hostile, quite confrontational and demanding a renegotiation of the bailout essentially that results in new money needing to come through from the euro area. The creditors will be very reluctant to deliver new finance under those sorts of conditions. So if we get a confrontational and hostile government coming to power in Greece, then 100 billion euro bailout for Spain's banks will probably need to be supplemented by additional bailout for the Spanish government and potentially some temporary bailout facility for the Italian government as well. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
