News Column

Spain Suffers Downgrade, EU Says Aid Ready

June 7, 2012
European Union flag

The European Union said Thursday it was ready to help Spain recapitalize its banks, as the country suffered another credit ratings downgrade but managed a successful bond auction, albeit at higher interest rates.

"If Spain needs help, it will have support," Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the Eurogroup panel of eurozone finance ministers, said in Brussels.

But EU officials insist that aid will only be made available after external audits clarify how much money Spanish banks need. Their verdict is expected by the end of the month, while the International Monetary is to give its assessment on Monday.

In London after markets closed Thursday, the Fitch credit ratings agency said Spanish lenders will need at least 60 billion euros (76 billion dollars), twice as much as it had previously estimated.

As a result, it downgraded Spain's status by three notches, from A to BBB, leaving the country just one step away from a "non-investment grade."

The cost of bank restructurings may even rise to 100 billion euros "in a more severe stress scenario," Fitch said.

The same figure was mentioned by Antonio Lopez-Isturiz, a member of the European Parliament for Spain's centre-right opposition and general secretary of the conservative European Peoples' Party (EPP).

Fitch said that Spain was "especially vulnerable to contagion from the ongoing crisis in Greece," and its limited "ability to intervene decisively in the restructuring of the banking sector ... has increased the likelihood of external financial support."

In late April, Madrid had already been downgraded two steps, from A to BBB+, by another credit ratings agency, Standard & Poor's.

Earlier Thursday, the country managed to raise 2.07 billion euros (2.6 billion dollars) from three bond auctions, with the 10-year benchmark bond more than three times oversubscribed.

However, Spain had to pay an interest rate of 6.12 per cent for the 10-year bond, up from the 5.74 percent it managed to offer in April, but below the record 7.09 percent that had to be offered at the height of the euro crisis in November.

Economists believe that yields above 6 percent are not sustainable in the long-term.

Investors reacted positively to the Spanish bond sales, with the Madrid Stock Exchange's key IBEX 35 index ending the trading day up by more than 1 percent.

"We are in a real stress moment and we are going through crucial weeks, both for the euro area and its single currency, and for the European Union," Juncker said in Brussels, calling for decisions at the EU summit in late June to strengthen the eurozone's setup.

German Chancellor Angela Merkel -- whose country is the E.U.'s powerbroker -- told ARD public television that the bloc needs "a so-called fiscal union, that is to say, more budget policy making together," and more transfers of sovereignty to Brussels.

In Washington, Federal Reserve (FED) Chairman Ben Bernanke told Congress that the crisis in Europe was a danger to the United States economy.

"The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely," he said.

Bernanke noted that the crisis in Europe had hurt U.S. exports, put pressure on US markets and financial institutions, and undermined the confidence of both U.S. consumers and producers.

The FED has "taken steps to make sure we're as well prepared as possible ... (and) stands ready to do whatever is necessary to protect our financial system," Bernanke told lawmakers.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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