The look ahead: Will Spain get enough to bail out banks?


Spain, one of five European countries that has sought international financial assistance, may find out by July 9th the terms of a deal to bail out its beleaguered banks.

The Spanish government on June 25th formally asked international creditors for a loan to support the struggling sector. A check-up of the Spanish financial system indicated that the nation’s banks may need up to €62 billion. The Eurogroup could offer the country up to €100 billion.

Finance ministers have said that providing assistance to Spain is warranted to safeguard financial stability in the euro area. The amount of money offered would be determined by an assessment of Spanish financial institutions. In return, euro-zone leaders could seek reforms targeting the financial sector. That scenario could change. Leaders at an EU summit in Brussels agreed last week to create a single banking supervisor for the euro area, which would allow for a more direct way to recapitalise banks. The agreement could lighten the burden on individual countries such as Spain to bail out domestic financial institutions.

Prior to Spain’s bail-out request, Moody’s Investors Service downgraded Spain’s government bond rating based on its efforts to recapitalise its banking system.

“This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis,” Moody’s said in a news release. “… The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern.”

That weakness also caused Moody’s to downgrade long-term debt and deposit ratings for more than two dozen Spanish banks in June.

Concerns with the European debt crisis appear increasingly to be spreading to the US. BDO USA issued a recent report that indicated euro-zone woes are in part leading to fewer IPOs in the US.

“The capital markets community is clearly concerned that economic turmoil overseas will keep markets volatile, making for a challenging time to conduct initial offerings,” Wendy Hambleton, a partner in BDO’s Capital Markets Practice, said in a statement.

CGMA Global Economic Forecast

A new report due out soon will show just how heavily the euro zone is weighing on the outlook of CGMAs.

The second-quarter edition of the CGMA Global Economic Forecast, a survey of more than 600 business leaders who carry the CGMA designation, is due out July 10th.

The results will be followed by a July 11th audio webcast titled “Q2: European Storm Clouds Cast Shadows on the Global Economy.” The webcast will run from 11am to 12pm EDT.

The first-quarter survey showed that CGMAs had become more confident about current economic conditions. But their optimism about the global economy as a whole was still at low levels.

—From CGMA Magazine staff reports.