Swedish minister urges action to avert Spanish bailout

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Europe must deal urgently with Spain's banking problems, which hang like a dark cloud threatening global economic recovery, Sweden's Finance Minister Anders Borg said yesterday (24 April).

Failure to recapitalise Spanish banks quickly could throw Madrid into a bailout programme, even though its current fiscal situation is manageable, Borg told the Peterson Institute for International Economics in Washington.

In a separate speech in the United States, a top German economist said Greece should leave the eurozone to rebuild its economy and shelter other troubled EU countries.

Spain’s solvent banks need their core capital shored up, problem banks need resolving and the European Central Bank needs to show flexibility by providing liquidity support, he said in addressing the institute.

"They [Spanish authorities] have to move on these issues because the uncertainty that we are now seeing in the stock market and in the world economy is to a degree that there is a banking cloud hanging over the recovery," Borg said.

The eurozone fiscal crisis is abating and banks – particularly in Spain where bad loans have risen to 8.2% of outstanding portfolios and analysts estimate that €38 billion is required to sort out the problems – now pose the greatest threat, Borg said.

European shares fell to a three-month low yesterday, and eurozone banks sank nearly 4% to levels last seen in late November. Investors were roiled by the collapse of the Dutch government over budgets and fears over Spanish banks.

Borg said policymakers have the capacity to tackle the banking problems, and the method – be it direct injection of capital into Spanish banks or through its government – is less important than the speed of action.

"We now have a European firewall and we have an IMF firewall, so the resources are there. But I think it is urgent to deal with these remaining bank issues, otherwise there is clear risk to the recovery," he said.

The International Monetary Fund this past weekend won promises of $430 billion to strengthen its crisis-fighting funds and the European Union has set up a €700 million bailout fund giving financial policymakers the capacity to prevent a worsening of the euro zone's sovereign debt crisis.

The IMF has proposed that the EU directly recapitalise banks and close troubled institutions, combined with EU-wide bank supervision.

While Borg said he would be "very happy" for centralised bank supervision, he doubted it is politically feasible in the next six months when it is opposed by British officials, France is in the middle of a presidential election and the Dutch government has collapsed. "If that cannot be done in a short period of time, then I think we need another flexible way to do it," he said.

A Greek exit from the eurozone?

Meanwhile, economist Hans-Werner Sinn said that Greece's ability to recover competitive economic standing will be severely constrained if it continues to use the euro, and other indebted eurozone countries will likely face similar struggles.

"I personally believe there's no chance for Greece to become competitive (while) in the euro zone," Sinn, the head of Germany's prominent Ifo economics institute, said in a luncheon speech in New York.

"If Greece is kept in the eurozone, there will be ongoing mass unemployment. But if they exit, they will see a very sudden recovery," he said, as lower prices boost competitiveness.

He also cited risks of other indebted eurozone countries facing severe spending cuts and tax hikes.

"Cutting wages and prices to the extent necessary in some southern European countries is impossible, whatever the politicians say," Sinn said. "Policy is unable to overcome the laws of economics."

Greece has received more than € 100 billion in aid since its debt crisis began, and last month creditors agreed to trade their Greek bonds for lower-valued securities.

Sinn said it would have been better to use that money to help Greece manage its exit from the eurozone.

Spain will force banks to move all their real estate assets into a special holding company within weeks, in a bid to reassure investors the lenders won't need a further rescue, three government and financial sources told Reuters on 24 April.

The real-estate holding entity should be up and running by the summer, but the final form and details are still being discussed by the banks and the government, one government source said. It is expected to dissolve after 10 years.

A second government source emphasised that options were still being weighed and that no decision had been made.

Spain's ability to avoid an expensive state rescue for its fragile banking system - which was devastated by the 2008 crash of a decade-long building boom - is key to the country's efforts to keep debt under control and avert a European bailout.

The Spanish government in February forced the banks to write down massively the value of undeveloped land, unfinished developments and foreclosed properties. That was a third round of restructuring for the troubled sector.

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