EUROPEAN leaders are mustering resources to rescue Spanish banks, regardless of Madrid's protestations, amid intensifying pressure from markets and politicians around the world.
German and European Union officials are working on plans, it has emerged, to inject cash into the stricken sector, perhaps using the bailout funds, the European Financial Stability Facility and the European Stability Mechanism.
Officials in Brussels said the contingency strategy to support Spain could be "austerity lite", rather than tied to conditions like the Greek and Portuguese bailouts, to restore confidence more quickly. The bailout could be as much as ?80 billion ($A101 billion), rather than the ?40 billion Madrid reckons its banks need. Mario Draghi, president of the European Central Bank, said the ESM's current treaty "forbids direct recapitalisation of the banks", but a shift in political rhetoric injected hope into fraught financial markets.
Shares jumped as traders bet that the Federal Reserve and even the Bank of England were poised to act to stem the crisis and boost the global economy. Both Ben Bernanke, chairman of the Fed, and his deputy are set to give speeches this week and could change tack in the wake of poor economic data.
In London, the FTSE 100 rose 2.4 per cent, its biggest one-day gain in six months. The Euro Stoxx 600 jumped 2.3 per cent the French CAC rose 2.4 per cent and in Germany, the DAX closed up 2.1 per cent. Oil rose above $US100 a barrel for the first time in a week.
Despite the optimism on financial markets, there was no sign of immediate change in policy, nor any relief from the advancing crisis.
The ECB held interest rates steady for the sixth month in a row.
French Finance Minister Pierre Moscovici said the eurozone was ready to "mobilise very rapidly".
ECB president Draghi admitted the markets were "rightly alarmed" in recent weeks but declared: "We stand ready to act."
Luis de Guindos, Spain's Finance Minister, said he had "absolutely not discussed any intervention in Spain's banks" and insisted Madrid would unveil a rescue plan for the banks within two weeks.
"In no more than 10 or 15 days we will have the report [on the banking sector] from the independent auditors," Mr Guindos said. "From there the Spanish government will take the decisions it has to take in terms of recapitalising the institutions."
But Madrid may not be given that much time. Today Spain faces a big test in the bond markets as it tries to raise ?2 billion at a debt auction.
Economist Nicholas Spiro said: "Even though the size of the auction is modest, it will be the most challenging sale of the year given the mounting speculation that a bailout is imminent. The lead-up to the auction has been a shambles, with the government itself conceding that it has lost market access."
Mr Draghi admitted there was more risk, more uncertainty and little momentum in the eurozone, but still said the decision to hold rates had "very broad consensus".
US President Barack Obama and David Cameron, the British Prime Minister, discussed the advancing debt crisis by phone on Tuesday. They "agreed on the need for an immediate plan to tackle the crisis and to restore market confidence, as well as a longer-term strategy to secure a strong single currency", Downing Street said this week.
Mr Cameron called for speedy action to deal with the eurozone crisis on the eve of talks with German Chancellor Angela Merkel. But he cautioned against holding Germany solely responsible for delays in dealing with the long-running debt crisis.
"Speed is of the essence," said Mr Cameron. "We need to get our economies moving. Clearly the eurozone crisis is the biggest threat to the world economy today."
Meanwhile, Mr Obama spoke to Dr Merkel and Italian Prime Minister Mario Monti on the need to strengthen the eurozone, the White House said.
More than 800 bankers and policymakers are due to meet at the Institute of International Finance annual conference to discuss the crisis. The institute's head, Charles Dallara, who negotiated on behalf of private bondholders in the Greek debt restructuring, is expected to announce his retirement after 19 years.
Frequently Asked Questions about this Article…
Is a European rescue for Spanish banks happening and what evidence is there?
European leaders and officials are actively mustering resources and working on contingency plans to inject cash into Spain’s stricken banking sector. The article says German and EU officials have discussed using bailout funds such as the EFSF and the ESM, and political rhetoric has shifted in a way that lifted market sentiment—so a rescue was clearly being prepared, though details and timing were still being worked out.
Which EU funds could be used to bail out Spanish banks (EFSF, ESM) and what limits exist?
Officials have discussed using the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to inject cash into Spanish banks. However, ECB president Mario Draghi noted the ESM’s current treaty forbids direct recapitalisation of banks, meaning legal or political changes would be needed for the ESM to recapitalise banks directly.
What does 'austerity lite' mean in the context of a possible Spanish bank bailout?
Brussels officials suggested the contingency strategy to support Spain could be 'austerity lite', meaning a bailout might come with fewer or lighter conditional fiscal measures than the stricter programmes seen in the Greek and Portuguese bailouts—designed to restore confidence more quickly rather than impose deep, immediate austerity.
How large could a Spanish bank bailout be compared with Madrid’s estimate?
The article reports officials have discussed a bailout that could be as much as €80 billion, compared with Madrid’s own estimate that its banks need about €40 billion. That indicates EU planners were considering a larger rescue to restore confidence in markets.
How did financial markets react to the news of a possible rescue and related policy signals?
Markets rallied on the rescue talk and signs central banks might act: the FTSE 100 rose 2.4%, the Euro Stoxx 600 jumped 2.3%, France’s CAC climbed 2.4% and Germany’s DAX closed up 2.1%. Traders also bet the US Federal Reserve and the Bank of England could move to support the global economy, and oil briefly rose above US$100 a barrel—though the ECB had held rates steady that week.
What timeline did Spain give for assessing and rescuing its banks?
Spain’s finance minister, Luis de Guindos, said an independent auditors’ report on the banking sector would be ready in no more than 10–15 days, and that Madrid would unveil a rescue plan for the banks within two weeks. After the audit, the government said it would decide on any recapitalisation measures required.
What near-term market tests should investors watch related to Spain?
Everyday investors should watch Spain’s bond auctions—at the time the country was attempting to raise €2 billion at a debt auction—and any signs of lost market access. The article notes that even modest auctions were likely to be highly challenging given speculation a bailout was imminent, so auction demand and yields were key short-term indicators.
Which policymakers and international leaders were involved and why does that matter to investors?
Key figures mentioned include ECB president Mario Draghi, US Fed chairman Ben Bernanke, Spain’s finance minister Luis de Guindos, French finance minister Pierre Moscovici, and leaders such as Barack Obama, David Cameron, Angela Merkel and Italy’s Mario Monti. Their discussions and co‑ordination matter because political will and central-bank signals influence whether a rescue happens, what form it takes and how quickly markets regain confidence.
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