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Spain's budget minister acknowledges nation's banks need help

June 5, 2012 |  7:05 am


BRUSSELS -– Spain’s budget minister on Tuesday became the first Cabinet minister to acknowledge what investors have feared and suspected: Spain cannot afford to rescue its troubled banks on its own and needs some form of international aid to do so.

Budget Minister Cristobal Montoro said Spain’s borrowing costs have become too high and called for European funds to recapitalize Spanish banks, which are heavily weighed down by bad real-estate loans that threaten to bankrupt the country. Montoro said the amount of money Spain needs is not “excessive,” but that the question remains as to precisely where the money should come from.

Montoro's comments in a Spanish radio interview came a day after neighboring Portugal agreed to inject $8.25 billion into three of its banks amid a review of that country’s progress since a bailout by the European Union and International Monetary Fund last year.

Spain is hoping for a relatively small infusion of aid rather than the full-fledged bailouts granted to Greece, Portugal and Ireland. Those rescue plans include close fiscal oversight by outside authorities, a situation Madrid wants to avoid.

Instead, Spanish officials hope that EU rules can be amended to allow them to tap a new European bailout fund or to allow the European Central Bank to recapitalize Spanish banks directly. Both ideas have faced resistance from Germany, but there are signs that Berlin may be willing to bend.

"The risk premium shows Spain doesn't have the market door open," Montoro told Onda Cero radio in Madrid, referring to the difference between the high rates Spain must pay to borrow money in the open market and the much lower rates Germany enjoys. “That’s why it’s so important that the European institutions open up and help us [stabilize]."

Montoro said he expects European officials to approve a new “banking union,” and a summit of EU leaders is planned for the end of this month. Spanish Prime Minister Mariano Rajoy has also called for such a centralized financial authority, with the power to recapitalize banks without government involvement.

The head of Spain's largest bank also threw his support Tuesday behind the idea of using European money to recapitalize Spanish banks. While his bank would likely not need such aid, Banco Santander Chairman Emilio Botin said that about $50 billion would be enough to shore up the Spanish banking sector.

Finance ministers from the Group of Seven industrialized nations are scheduled to hold an emergency conference call later Tuesday, in part to discuss Spain’s financial situation. Spain's bond yields have been slowly climbing toward a level widely believed to be unsustainable for it to keep borrowing from the commercial markets, which it is planning to do at a crucial debt auction Thursday.


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Photo: Spanish Budget Minister Cristobal Montoro, in the Spanish parliament May 16. Montoro is the first government minister in Spain to acknowledge that the country needs outside aid to shore up its failing banks. Credit: J.J. Guillen / European Pressphoto Agency