Government offers banks 100 billions euro safeguard this year
Written by Allan on October 14th, 2008New shock treatment to reactivate financial activity. The government will back bank bonds and promissory notes until year’s end for up to 100 billions euros. Likewise, an agreement has been reached – a “preventive” measure – whereby the government will buy up recapitalized bank shares.
The Spanish executive put the decisions adopted on Sunday by the Eurogroup (made up of the heads of government of the Euro-zone countries) into effect these days. An extraordinary meeting of ministers approved these two fundamental measures to encourage a recovery of confidence in the Spanish banking sector.
The first consists of a large public collateral package for the banks. The government has committed itself to guaranteeing the issuing of promissory notes, bonds and other obligations undertaken by the financial entities operating in Spain. This measure, which is a fundamental step for the re-establishment of the inter-banking market, will be in effect until December 31, 2009. While the global amount has not yet been fully calculated, the executive announced yesterday that it would back, only until the end of the fiscal year, up to 100 billion euros of obligations. The 15 largest Spanish entities currently carry obligations for 2008-2009 of some 75 billions euros.
The banks and savings and loans opting in on this initiative must pay a fee for said guarantee. Affiliates of foreign groups operating in Spain will be able to participate if they have significant operations here. Regarding time limits, only those assets with a maximum 5-year lifespan will be guaranteed.
The Spanish Prime Minister, José Luis Rodríguez Zapatero, explained that the adoption of this measure is “vital, essential and indispensable” given the “serious situation” the financial markets are going through. He also reminded listeners that the decision to prop up the inter-bank market was taken within the framework of the Eurogroup agreement reached on Sunday.
The 100-billion-euro safeguard measure is complementary, said Zapatero, to the creation of a state fund that would buy up to 50 billions euros of financial assets.
Acquisition of bank titles
The second measure adopted by the government, and which is also within the framework of the Euro-zone accord, essentially authorizes the economy ministry to buy assets from financial entities that need to strengthen their capital bases.
This decision is of a “preventive” nature, according to Zapatero, since no Spanish financial entity currently has solvency problems. If that were to be the case, the government could purchase both shares and/or preferred and participating quotas, the equivalent of savings and loan shares.