Comment: On Monday, Spain may pay for weekend off

By GEORGE KEREVAN
Published on 09/06/2012 00:00

IF THE rumours are correct, today is the day that the Spanish government will formally request the EU to bail out its ailing banks – a weekend announcement means the markets are safely closed.

A flurry of recent events has signposted the move. Six months ago, Spain elected a right-wing government led by Mariano Rajoy, pledged to austerity. Rajoy delivered but the economy tanked, worsening the government’s debt crisis and putting pressure on Spain’s banking system, which is crippled with bad property loans.

The crisis was papered over temporarily by huge short-term loans to Spain’s financial sector from the European Central Bank (ECB). Foolishly, the banks did not use this cash to boost reserves.

Instead, they bought risky Spanish government debt. This ECB money has been used and Spain had to go back to the bond markets this month. But on Tuesday the treasury minister, Cristobal Montoro, caused near panic when he announced the bond markets were shutting their doors to Madrid.

On Thursday Fitch slashed Spain’s sovereign credit rating by a full three grades, from A to BBB. That pushed Spanish bond yields to their highest since joining the eurozone. Worse, Fitch suggested that the true cost of recapitalising Spanish banks could be as high as €100 billion (£81bn). This is far higher than the government’s figure of €40 billion and opened the prospect of a run on Spain’s banks.

Behind the scenes, prime minister Rajoy was desperately appealing for help from Germany. On Saturday, he announced Spain would be prepared to cede political sovereignty in a full European fiscal union if would lead to the ECB supporting the sovereign bond markets – something Berlin opposes.

After Spain’s credit downgrade, Germany’s chancellor Angela Merkel signalled she would support aid for Spain’s banks. This could take the form of the eurozone’s temporary bailout fund, the Stability Facility, or its permanent replacement, the Stability Mechanism (operational next month), to recapitalise Spain’s banks.

Conditions for such a loan could prove contentious. Under current rules, loans can only be channelled via a member government – which would increase Spain’s debt ratio and put yields into orbit.

Even then, problems will remain. First, stemming the flood of red ink at Spain’s banks does not mean the bond markets will lend to the Spanish government. If Greece votes to tear up its bailout agreement on 17 June, expect a fresh crisis, with Spain unable to borrow. That would trigger some sort of ECB intervention. Second, there remains an urgent need to restore confidence in Europe’s banking system as a whole. The ECB wants to see a pan-European deposit guarantee scheme and a permanent bank resolution fund. Funding this involves a new tax on financial transactions – something the UK is pledged to oppose. This week Chancellor Osborne was adamant: “There is no way that Britain is going to be part of any eurozone banking union”.

Unlike Greece, Ireland and Portugal, Spain really is too big to let fail. We may have entered the final act in the euro crisis.

Will M&S bank tailor to fit the customer?

WHAT are we to make of the decision by Marks & Spencer to roll out 50 in-house bank branches over the next two years? Probe a little deeper and this is a rebranding exercise by M&S Money, which provides the retailer’s financial product range of store cards, insurance and loans.

But M&S Money is 100 per cent owned by HSBC, Europe’s biggest bank. In return for access to the shop’s 21 million customers, HSBC splits the profits of M&S Money 50:50 with Marks (the store).

Clever HSBC trying to get round the public’s distrust of traditional high street banks by piggy-backing on the M&S label. This gives HSBC the chance to attract new depositors from M&S’s older, affluent customer base. No wonder Joe Garner, UK boss of HSBC, can say: “This is our most significant innovation in retail banking since we launched First Direct”.

As for Marks (the store), its share price fell yesterday after Thursday’s annual report revealed a worrying decline in the retailer’s share of the UK womenswear market.

Question: will mortgages from M&S Bank be easier to attain than those from the notoriously picky HSBC high street branches?