View the article online at http://citywire.co.uk/money/article/a594046
Q&A: Spanish banking crisis
A quick guide to the links between Spain’s feeble banks, its growing public debt and the soaring borrowing costs that are crippling the nation.
The prohibitively high cost of borrowing for the Spanish government is effectively driving the country into greater debt. Treasury minister Cristobal Montoro commented: ‘Spain does not have the door of markets open to it and the challenge is to build confidence with these markets.’ Most other countries were forced to seek a bailout once their bond yields broke above 7%.
What options are being discussed for a bailout?
The amount required to rescue the country’s banks is estimated to be between €40 billion and €180 billion. Spanish economy minister Luis de Guindos has denied claims that the country’s banks will request a bailout and stressed that the country is awaiting the results of the banking sector audit before further steps are taken.
The options open to the nation are limited as the current European Financial Stability Fund (EFSF) doesn’t have enough money to bail the country out. Although the funds could cover the banks, the rules only allow countries to access the money.
A possible option is the formation of a banking union, whereby financial institutions would be monitored at an EU level, a fund would be set up to help wind up failing banks and deposits would be guaranteed across the union to avoid capital flight from one nation to another.
However, there has been great resistance from German chancellor Angel Merkel to agree to the plan, which may ultimately see German taxpayers foot the bill for eurozone banks.
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