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Looming bank losses and Spain’s troubled government finances are what European Union leaders don’t formally plan to talk about when they sit down for talks on Thursday about how to fix their battered economies and set tighter budget rules.
The potential for banks’ losses on European loans — particularly from the Spanish housing boom — have spooked financial markets this week, sending the Spanish government’s borrowing costs to a record-high amid rumours that it might have to ask for outside financial help.
Officials said EU leaders will talk about long-term fixes to their debt crisis, thrashing out stricter rules and tougher sanctions to make countries obey EU debt and deficit limits in the future. They also want to set out 10-year goals to make their economies more competitive.
Spain “will not be in the centre of the summit,” Austrian Finance Minister Joseph Proell told reporters Thursday — as several officials told reporters they were relieved to have a “normal” summit after a string of crisis meetings to bail out Greece and set up a massive “shock and awe” euro750 billion ($1 trillion) rescue package for other nations.
Leaders will, however, hold wide talks about the current crisis — with Spain updating other countries on what it has done under pressure from other EU nations to curb a ballooning deficit.
Daniel Gros, an economist at the Brussels-based Centre for European Policy studies think tank, calls some kind of financial rescue for Spain “almost unavoidable” — and says it could run to hundreds of billions of euros to cover liabilities for government and private debt that he says top euro300 billion.
The European Central Bank predicts that banks in the 16 nations that use the euro could be forced to write down loans by some euro195 billion this year and next year as they recognize the lost value of securitized investments — such as the complex structures based on sub-prime housing loans — as well as rising defaults from European borrowers unable to pay back loans.
More seriously, eurozone banks also hold government bonds and private debt for four heavily indebted members of the currency area: Spain, Greece, Portugal and Ireland. French banks are exposed to some $493 billion and German banks to some $465 billion of these countries’ debt, according to a Monday report from the Bank of International Settlements.
So far EU leaders have had little to say about the huge costs they could be forced to pay for delayed action on cleaning up their banking system.
Financial markets charging higher costs for Spanish borrowings show that they are already treating the country as if it had debt levels of 100 percent of gross domestic product — instead of this year’s estimated 64.9 percent.
In conventional terms, Spain has less debt by than Greece, and less even than Germany and France. But troubles in its banking system and little prospect of growth — the unemployment rate is over 20 percent — mean the government faces higher and higher borrowing costs when it goes to the bond market to renew its debt, which in turn raises fears of default. That vicious spiral ultimately sank Greece’s efforts to pay its debts on its own.
“The Spanish banking system has been cut off, the spreads on German bonds is increasing all the time,” said Gros, pointing to the difference between the interest rates wary investors demand to buy Spanish bonds compared to low-risk German ones.
“With the markets going the way they are, the amounts could be very large” for any required bailout, he said.
A Spanish bailout would be another black eye for the euro, which has sagged from $1.51 late last year to around $1.22.
Officials insist that crisis talks are not on the agenda — which doesn’t mean they won’t crop up informally or in private discussions. The EU was also slow to react to Greece’s problems — denying a bailout was imminent weeks before it happened.
“There is no crisis, there is no major problem,” a French government official told reporters in Paris on condition of anonymity. “The only thing that could cause a crisis is for everyone to keep repeating that there is going to be one.”
European Commission spokesman Amadeu Altafaj Tardio described as “rubbish” a report in Spanish daily El Economista that the IMF, the European Union and the U.S. Treasury are preparing a package for Spain that includes a euro 250 billion credit line.
But the Spanish government’s strenuous efforts to push through a tough austerity program is, in Gros’ view, a sign that “it is trying to fulfil all the International Monetary Fund conditions beforehand because then they can say that we get the money without any conditions.”
The Spanish cabinet approved key labour market reforms Wednesday that are designed to encourage companies to hire — and make it easier to fire — that will only become final if the parliament votes yes, which is not certain.
Spain is under pressure to make long-term changes to shake up a rigid labour system that protects the lucky few in secure jobs and deters new hires — and had helped it rack up the highest jobless rate in the eurozone with nearly one in five working age people out of a job.
But it will also need to stress test its banks to see what potential losses they face. Once the labour reform is complete and the full costs of any stress tests are apparent, Spain will have a better idea of the total losses it faces.
Gros says Spain’s future prospects are gloomy: “It’s very difficult for politicians to accept. There’s no way for Spain to avoid ten years of recession or no growth.”
While northern European nations such as Germany, France and the Netherlands can rely on exports to wealthier emerging countries in Asia or South America, southern Europe faces a far tougher path — and in Spain’s case, an end to dreams of being a major player on the world stage.
Reversing that slide would mean making major reforms to open up labor and product markets — that could force workers to retire later and make protected state monopolies face real competition for the first time. That’s hard medicine and it’s uncertain that even hard times will make it easier to swallow.
Story from The Associated Press
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