World Business

Spain defends its solvency

(Xinhua)
Updated: 2010-06-21 14:55

MADRID - International markets backed the Spanish economy this week after days of intense rumors regarding the country's need for a financial rescue plan.

The successful auction of 10-year and 30-year bonds on Thursday, and the solvency of Spanish banks, reduced Spain's risk premium while the Madrid stock-exchange finished the week leading European gains.

In a politically weak moment for the government, Prime Minister Jose Luis Rodriguez Zapatero enjoyed the support of the International Monetary Fund (IMF) and the European Council after it had encouraged the publication of the stress-tests on the major European banks.

"Nothing (is) better than transparency to demonstrate our solvency, to offer trust and to leave so many unfounded rumors behind," Zapatero said.

Rumors and denials

Rumors about the possibility of Spain needing a Greek-style Euro bailout were recurrent inside Spain and abroad. Despite the government's denials, and with 12 percent of the European Union (EU)'s GDP at stake, growing doubts about Spain's solvency set off the alarm bells in the financial markets.

Once again, pressure on Spain's debt rose sharply. Yield on 10-year bond reached almost 5 percent and the spread with the German bund, a European benchmark, went over 230 basis points, a peak figure in the euro's history.

Spain is making increased efforts to persuade investors of the viability of its adjustment plan with which the government seeks to cut back the third largest public deficit in the Euro-zone (11.2 percent of its GDP), to restructure its savings banks, and to reform its labor market so as to bring the economy back to growth.

Some experts believe, however, that the new policies will not be enough to recover market confidence.

Chairman of Banco Bilbao Vizcaya Argentaria (BBVA), Spain's second largest bank, warned this week that "financial markets have withdrawn their confidence in our country."

According to Francisco Gonzalez, "for most businesses and Spanish companies, international markets are closed."

The sovereign debt crisis was relieved with the Treasury's last auction, which managed on Thursday to allocate another 3.47 billion euros ($4.29 billion) in 10-year and 30-year securities. Nevertheless, Spain had to pay a very high interest rate to attract investors.

Marginal interest for both types of securities reached 4.9115 percent and 5.937 percent respectively, the highest rates in almost a decade. The sale's success reduced Spain's risk premium to just below 200 basis points.

Following the Treasury's auction on Thursday, the Ministry of Finance assured that Spain has already sold enough debt to salvage the redemption of 24 billion euros in the end of July.

European council support

Further relief for the Spanish government came the same day with the support of the European Council meeting in Brussels, the last in Spain's presidency of the EU. Referring to the measures adopted by Rodriguez Zapatero's Executive to curb the deficit, EU President Herman van Rompuy said that these were "brave and efficient."

The following day, the French chief of the IMF, Dominique Strauss-Kahn, visited Madrid to show his staunch support for the government's plan. On the new Spanish labor reform bill, Strauss-Kahn highlighted that it is "absolutely in the right direction," adding that "Zapatero is setting the foundations for two decades of growth" in Spain.

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Zapatero also ceased the occasion of the Brussels summit to quell rumors on Spain's insolvency by pointing to the EU's recent stress-tests on its major banks, undertaken last week to ascertain the capacity of financial institutions to deal with a possible worsening of the crisis.

The tests confirm that the country's two main lenders, Santander and BBVA, head the list of Europe's solvent banking institutions. "I have always believed in the strength and in the solvency of our country," said Zapatero.

However, the health of the Spanish financial system shown by the stress-tests was soon marred by the new bad loans figures published by the Bank of Spain, which reached 5.5 percent in April, the highest rate in 15 years.

Market gains

The results of the stress-tests was a new breather for the government, which passed the labor reform plan a day before the Brussels summit in order to have its homework done.

Zapatero still has a few outstanding tasks before meeting all the EU's demands, such as the completion of the restructuring of the savings banks, the reform of the pensions system, and the handling of the general strike, announced by the Trade Unions this week for the summer.

Support from European leaders for Spain's public finances relaxed the country's risk premium and returned an air of optimism to the stock market.

Spurred by the gains of its major banks, Spain's benchmark index, the Ibex 35, headed profits in the European trading floors, accumulating weekly gains of over 4 percent, closing on Friday at 9,971.8 points.