Open Europe Blog

There have been a couple more interesting developments about Spain today – the first one, at least in chronological order, being the publication of our new briefing. Speaking at the Global Investment Conference in London, ECB President Mario Draghi said,

To the extent that the size of these sovereign premia [i.e. the high borrowing costs of Spain, but also Italy] hamper the functioning of the monetary policy transmission channel, they come within our mandate…Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. Believe me, it will be enough.

Draghi’s words were seen as a hint that the ECB could intervene in the secondary bond markets after a 19-week stop. This sent Spain’s borrowing costs significantly down, with the interest rate on ten-year bonos falling slightly below 7% – which remains unsustainable in the long term, but is better than the mind-boggling 7.7% touched yesterday.

Quite extraordinary how the ECB President saying that the bank will continue to act within its mandate can bring about such ‘optimism’. We would usually expect a denial/counter-comment from Germany or another more conservative eurozone member, but then maybe Draghi’s remarks were well-timed to take advantage of the fact that Angela Merkel is on holiday

On the Spanish regions’ front, the government of Castilla-La Mancha – headed by Dolores de Cospedal, Secretary General of Rajoy’s Partido Popular – refused to rule out seeking a bailout from the Spanish government, although it stressed that it doesn’t need one “urgently”. Meanwhile, Catalonia’s Economy Minister, Andreu Mas-Colell has made clear that his region won’t accept any “political” conditions the central government may try to attach to the loan Catalonia has decided to request.

His counterpart from Comunidad Valenciana, Máximo Buch, predicted that the Spanish government could consider boosting its €18 billion Autonomic Liquidity Fund (FLA, the rescue fund for Spanish regions) later this year, once all the Spanish regions in need of a bailout have shown their hand. Interestingly, Buch also suggested that several “shirking” regions will eventually follow Comunidad Valenciana’s example and request a loan, sooner or later.

On a slightly separate note, Bankia’s former chief Rodrigo Rato – who also served as Spanish Economy Minister and IMF Managing Director – has been heard by Spanish MPs today, and said a couple of interesting things. First off, he claimed that the Bank of Spain “ordered” him to go ahead with the merger of Caja Madrid and Bancaja, despite it being quite clear that the two cajas held a worrying combined total of doubtful real estate assets. For those unfamiliar with the story, Caja Madrid and Bancaja are two of the seven Spanish savings banks that form part of Bankia, which is effectively a conglomerate. Together, the two form almost 90% of Bankia. 

Rato (in the picture) also told MPs that, in May, he submitted a restructuring plan for Bankia to the Spanish Economy Ministry, but was ignored. Rato’s plan involved a loan of ‘only’ €6 billion from the Spanish government – i.e. four times cheaper than the almost €24 billion Bankia is now in line to receive.
Although this is only Rato’s version of how things went, this is pretty strong stuff – considering that Bankia is essentially where the whole story of the Spanish bank bailout started…   

As usual, you can follow the latest development in the eurozone crisis on our Twitter feed, @OpenEurope

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