Wednesday, 6 June 2012

Daily Forex Brief London: Wednesday 6th June 2012

After weeks of denying the inevitable, Spain's leaders have at last finally accepted that they need European assistance to recapitalise their broken banks. How these banks get access to the capital they so desperately require is the subject of much disagreement between Spain and European policy officials. Fearful of the austerity conditions that would be imposed on them if they apply for a bailout to the EFSF, the Spanish government instead is imploring Germany to allow their banks to get funding directly, a position that has some support in both Brussels and Paris. However, neither the EFSF nor the ESM are allowed to make direct capital injections, and Germany remains inextricably opposed to this course in any event. According to Sueddeutsche Zeitung, one option being considered is permitting the EFSF to lend money to Spain's FROB (the bank rescue fund), under the proviso that problem banks are either closed or merged. This would get around Spain's fear of signing up to additional austerity and reforms. From the perspective of Germany and the rest of northern Europe, recapitalising Spain's banks in this way would definitely be much cheaper than a full bailout of Spain, notwithstanding their reservations. Budget Minister Montoro yesterday claimed that the sum required to recapitalise Spain's banks was relatively modest, at around EUR 40bn. We are not there yet, but it is in both Spain's and Germany's interest, not to mention the rest of Europe, to find a way to recapitalise Spain's banks quickly.

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