AFP PHOTO / JOSEP LAGO
There is growing concern, if not panic, all over Europe around the confrontation between Madrid and Berlin, concerning the issue of recapitalisation of the Spanish banks. So far Madrid keeps saying that it will not need external help for that, but the sheer truth is that in case Spain tries to find the €50 billion needed to recapitalise Bankia and three more ailing lenders, the country might find itself cut off from markets.
The daring investors, if any, who will lend €50bn to Spain will ask for interest rates which will exceed even the prohibitive area of 7%. In such a case Spain will be automatically considered as insolvent. Informally the Rajoy government asks urgently for help but they insists the aid should go directly to banks from the European Financial Stability Facility, without the Spanish Treasury being involved. In this case the affair will be restricted between the Spanish banks and the EFSF.
Germany however strongly resists this solution because in this way the country's government remains an 'outsider' with no obligations whatsoever towards the central European institutions. Berlin proposes instead that it should be the Spanish government to borrow the money and then transfer it to the country's ailing banks. In this way the country's exchequer would be responsible to return the money to the EFSF. This is not however the whole story. What Berlin has in mind and presses hard towards this direction, is that Spain should get the financial support it needs, but in order to receive it the country should sign a Memorandum of Understanding introducing Draconian austerity measures, as it happened in the cases of Greece, Portugal and Ireland. And the Greek chaos is the worst 'advertiser' for this solution.
In the meantime, markets seem to predict a solution along this last option. That is why they recorded very good gains on 6 June, and also opened well the next day. The truth is that Madrid has no other option to recapitalise its banks and also find more finance to cover its current fiscal deficits that the official aid from Brussels and very probably the IMF. The problem is though that in this case the country will lose its financial sovereignty and may end up like Greece. Until yesterday night Berlin sources were calling Madrid to ask officially for help and thus trigger a joint bailout from EU-ECB-IMF as in the cases of Greece, Portugal and Ireland. And this is exactly what Madrid wants to avoid.
In any case the confrontation will not last more. Markets predict that in a few days, and possibly this weekend, the whole affair will be concluded along the lines Berlin wants. Seemingly is not only Germany backing this solution but all the surplus Eurozone countries and probably France. The French minister of Finance, Pierre Moscovici, said yesterday that the European support mechanisms are ready to help Spain if the Madrid government asks for it. This statement is a clear indication that the Spanish government must be involved.
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