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New Open Europe briefing: Funding needs of Spanish banks could top €110 billion

25 Jun 2012

Spanish Economy Minister Luis de Guindos has this morning sent Eurogroup Chairman Jean-Claude Juncker the formal request for a bank bailout. El País notes that the letter does not mention any specific amount, as it says that the details of the rescue package will be finalised before the next meeting of eurozone finance ministers, scheduled for 9 July. The ministers previously agreed that the rescue package could total up to €100bn.

Following the request, Open Europe has published a new briefing looking at the funding needs of Spanish banks and the Spanish state. The briefing argues that, taking into account that Spanish house prices may drop another 35%, the country's banking sector could need an immediate €110bn capital injection to withstand potential losses – substantially above the recent official estimates. Without substantial banking reform and an upturn in the state of the Spanish economy this amount could increase further.

The state faces funding costs of €548bn over the next three years, as well as problems such as controlling regional spending and encouraging economic growth – all of which, again, makes the risk of a full bailout for Spain more likely. Open Europe estimates that total exposure of EU countries to the Spanish economy is around €913bn.
Open Europe research Open Europe blog El País ABC FT El País 2 El Mundo El Mundo 2

Open Europe selected as one of five "tweeps" on Twitter who “offer exceptional commentary on the euro-crisis”
Leading American financial magazine Barron’s has selected Open Europe’s twitter account as one of five that “consistently provide great information and trenchant analysis” on the Eurozone crisis. Barron’s notes “a think tank based in the UK that deploys a small army of research analysts fluent in more than a dozen languages to keep tabs on the crisis, both reporting and commenting on the news. A recent typical tweet dismissed any reasons for optimism for Spain after its 10-year bond yield fell below the critical 7% level. If investors were buying on rumours that the European bailout fund would buy the troubled bonds, forget it. Yes, all that in one tweet.” Follow us @openeurope

Four EU leaders publish draft proposal for EU banking union;

Greater EU control over spending and taxation demanded by Germany will require Treaty change
Ahead of this week’s EU summit, EU Council President Herman Van Rompuy, European Commission president José Manuel Barroso, ECB President Mario Draghi, and Eurogroup head Jean-Claude Juncker, have published a draft proposal setting out plans for a banking union including the creation of a single supervisor and rulebook for banks in the EU, and a common deposit insurance and bank resolution fund. Britain and other non-eurozone countries would be free to opt out. The paper also included longer term plans for Eurobonds and a eurozone redemption fund, but admitted that greater EU control over taxation and spending – demanded by Germany before any steps for debt pooling can go ahead - are likely to require EU treaty changes. The draft also calls for the ESM – the eurozone’s permanent bailout fund – to be allowed to lend cash directly to banks.

In an interview with Der Spiegel, German Finance Minister Wolfgang Schäuble conceded that moves towards further political and economic integration would require amendments to the German constitution – which would have to be approved via a referendum - “much sooner than I had anticipated… a few months ago I would have said never in my lifetime, now I’m not so sure”.  Schäuble argued that “To date member states have always had the last word on European issues. This cannot remain the case. In important policy areas we need to transfer more competencies to Brussels without every member state being able to block decisions”.

Open Europe’s Director Mats Persson was cited by Polish daily Rzeczpospolita discussing the potential for fiscal and banking union within the eurozone as well as Polish news website Wiadomosci24. Open Europe’s research was also cited by Spain’s Capital Bolsa.
EUobserver FT CityAM Irish Times Irish Times 2 Spiegel WSJ WSJ 2 WSJ 3 IHT IHT Reuters FAZ SvD Näringsliv Kathimerini Bloomberg: Johnson Mail Rzeczpospolita

Troika delays mission to Athens as Greek Prime Minister and Finance Minister are both hospitalised;
IFOP poll: 78% of Germans, 65% of French, 51% of Spaniards and 49% of Italians back Greek euro exit
The EU/IMF/ECB troika delayed its latest mission to Athens yesterday as both the Greek Prime Minister and Finance Minister are still in hospital. The troika assessment of the Greek economy and bailout programme is now expected to start on 2 July. Both parties will also miss this week’s vital EU summit with Dimitris Avramopoulos, the foreign minister, and George Zanias, the departing caretaker finance minister, representing Greece instead. The delays further increase the pressure on the new government and means that the next €3.2bn tranche of bailout funds due late this month will also be delayed. The outgoing caretaker government has warned it will run out of funds to pay public sector wages and pensions by 20 July.

A joint policy document of the new coalition government was revealed over the weekend, showing that it plans to push for strong renegotiation of the bailout programme, including a two year extension on budget cuts, rejecting further cuts to the minimum wage, abandoning plans to cut 150,000 public sector jobs and reducing property taxes.

An Ifop Institute poll of 4,000 people in Germany, France, Spain and Italy showed 78% of Germans and 65% of French people wanted Greece to leave the Eurozone, with 51% in Spain and 49% in Italy also backing a Greek exit. Large majorities in all countries surveyed expect Greece to never pay its debts. Schäuble suggested the poll showed “how much trust Greece has forfeited among Europeans.”

Separately, Greek daily To Vima reports that, according to two separate internal documents – one from the EU-IMF-ECB Troika and another one from Greece’s interim Finance Minister George Zanias – Greece violated the agreements with its creditors as it hired a total 70,000 civil servants in 2010-2011.
Kathimerini FT FT 2 CityAM WSJ Independent CityAM 2 Irish Independent Telegraph Reuters EUobserver Dow Jones Handelsblatt Le Figaro To Vima Bloomberg

Bond deal with German länder paves way for approval of fiscal treaty
At a meeting on Sunday with representatives of Germany’s 16 Bundesländer, German Chancellor Angela Merkel agreed to the introduction of bonds issued jointly by the regional administrations and the federal level government in exchange for their support for ratifying the fiscal treaty in the Bundesrat, the upper house of the German parliament. However the both the fiscal treaty and the ESM treaty will still have to be given the all-clear by the German Constitutional Court.
Euobserver EUobserver 2 FAZ Handelsblatt
Der Spiegel reports that a study for the German finance ministry has claimed that a break-up of the eurozone and the re-introduction of the Deutsche Mark would cause a drop of 10% in the country’s GDP and push unemployment back to up to its record high of over 5 million.
Handelsblatt reports that German Finance Minister Wolfgang Schäuble has slammed US pressure on Germany, saying "Obama should rather be concerned with his own deficit which is higher than the one in the eurozone".

The ECB said Friday it will widen the range of securities it will accept from euro-zone banks in exchange for its loans, in an effort to help Spanish banks in particular to lend to households and businesses. The move was immediately criticised by the Bundesbank.

EU leaders last week decided to scrap a proposal for financial transaction tax involving all 27 member states, amid continued opposition from the UK, Sweden and others. Nine Eurozone countries have said they will now use “enhanced cooperation”, an EU law which allows a limited number countries to press ahead with a proposal if an agreement involving all 27 countries is not possible.
FT Weekend Saturday's Mail Saturday's Times

Dutch caretaker Prime Minister Mark Rutte has admitted that some of the austerity measures set out in the €13bn package submitted to the European Commission last April would be abandoned if his Liberal party (VVD) won the elections in September, the Irish Times reports.
Irish Times Reuters FT: Soros FT: Munchau WSJ: Nixon Irish Times: Kinsella Telegraph: Randall Telegraph: Bootle

The FT reports on a report by think tank JWG that the EU’s financial services industry will spend €33.3bn over the next three years complying with new regulatory demands.

FT Open Europe research

The FT reports that the European Commission’s draft proposals for the Alternative Investment Fund Managers Directive (AIFMD) threaten all non-Ucits funds (i.e funds established under domestic rather than existing EU regulations).

In an interview with the BBC’s Andrew Marr show, Tony Blair said, “The only thing that will save the single currency now is a sort of grand plan in which Germany is prepared to commit its economy fully to the single currency," adding, "If they sort it all out and Europe moves forward again then Britain is going to have a very interesting choice to make".
BBC: Andrew Marr Telegraph Guardian Times Mirror

An article in the Independent on Sunday noted that had the Government not closed a VAT loophole on carbon permits traded under the EU’s emissions trading system, the UK could have been faced with fraud reaching £2bn a year.
Independent on Sunday

Saturday’s Telegraph reported that Nick Clegg’s private secretary for foreign affairs, Callum Miller, will be in the UK delegation to this week’s European Council meeting.
Saturday's Telegraph Saturday's Independent: Grice

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