No Easy Answers on How to Fix the Banks in Europe

Beleaguered countries like Spain have been counting on a quick and neat way to fix their banks without taking on more crippling debt.

A European Union, left, and a Hungarian national flag, fly outside the Magyar Nemzeti Bank, Hungary's central bank, in Budapest.
A European Union, left, and a Hungarian national flag, fly outside the Magyar Nemzeti Bank, Hungary's central bank, in Budapest.

But a weekend meeting here of European Union finance ministers that was intended to lay the groundwork for that plan revealed the continued difficulty of reaching consensus among the 27 member states — even on measures to which they have already agreed in principle.

The disagreements also left a pressing question: How long can Spain afford to go it alone without outside financial help?

Spanish banks need tens of billions of euros that the government cannot afford to lend. And many economists and analysts say it is only a matter of time before Spain’s debt-plagued central government itself may need a helping hand.

It was on the banking front that the euro zone’s discord was most evident over the weekend.

The Spanish finance minister, with French and Italian backing, called for a quick timetable on measures that would allow a bank rescue program for Spain to proceed under terms favored by the government in Madrid. But ministers from Germany and elsewhere essentially said, “Not so fast.”

Even as that dispute played out here, on the other edge of the euro zone tens of thousands of demonstrators in Spain and Portugal continued to march in the streets. They were protesting government-imposed austerity measures that had taken a toll on the economies of both countries.

In Portugal, the government is struggling to narrow its deficit to meet the terms of its international bailout. In Spain, Prime Minister Mariano Rajoy is trying to cope with mounting debt problems and a recession-racked economy.

Time would seem not to be on his side — despite the assessment here by Austria’s finance minister, Maria Fekter, that “Europe is stabilized.”

Although the European Central Bank’s recent announcement of a program for buying the government bonds of troubled countries brought some calm to the euro zone, it was an even more recent European policy announcement that was the subject of discord among the finance ministers meeting here.

That was the proposal last Wednesday from the European Commission to create a single regulator, working under the central bank, to oversee the euro zone’s 6,000 banks. The commission proposed setting this process in motion by the beginning of next year and having the new system fully in place by January 2014.

The terms under which Spain hopes its bank rescue can proceed depend on quick adoption of the plan to create a central euro zone banking authority. The euro zone’s bailout funds — the European Financial Stability Facility and its successor, the European Stability Mechanism — are not allowed to lend money directly to banks — but could do so under the new bank supervisory system.

“We need to stick to the timetable,” Spain’s economy minister, Luis de Guindos, insisted to reporters on Saturday. “The objective for now has to be ambitious.”

Seconding that sentiment was the French finance minister, Pierre Moscovici. “We can’t waste time,” he said.

But Wolfgang Schäuble, the German finance minister, said at a news conference over the weekend that the commission’s timetable “will not be possible.”

Mr. Schäuble said the plan as currently drafted had created unrealistic expectations for how rapidly such a big change could be carried out across the euro zone. German state governments also are balking at giving the central bank oversight of their Sparkassen, the hundreds of small and midsize savings banks that do much of the lending to consumers and small businesses.

The dispute is critical to Spain because, in June, euro zone finance ministers agreed to muster as much as 100 billion euros, or $131 billion, in emergency loans for its ailing banking industry.

Spain’s real estate bust has left many of its banks with too many bad loans and not enough of a financial cushion against further losses. That, in turn, has imperiled big parts of the financial system, as Spain struggles with mounting debt, a double-dip recession and 25 percent unemployment.

But Mr. Rajoy has been reluctant to add to the country’s debt problems by having the government accept the European bank bailout money and guaranteeing to pay it back. Instead, he wants the money to be lent directly to the banks.

However, such direct infusions cannot happen until the new euro zone banking supervisory system is in place.

Just as pressing an issue for Mr. Rajoy is whether and when he might seek aid from the European Central Bank’s government bond-buying plan that the central bank’s president, Mario Draghi, announced on Sept. 6.

For now, investor awareness that the European Central Bank stands ready to buy bonds to reduce beleaguered governments’ borrowing costs has taken pressure off Spain and Italy and significantly reduced tension in European and world markets.

In fact, that respite is a big reason some finance ministers at the meeting here said there was no cause to rush to give the central bank yet more power under the bank supervisor proposal.

The central bank’s bond-buying pledge has taken “the catastrophic risk off the table,” Jacek Rostowski, the Polish finance minister, said in an interview outside the meeting on Saturday.

The benefits of the market calm for Spain could prove short-lived, though, if Mr. Rajoy cannot show he is in control of his country’s economic problems. Yet he has his own political reasons for not quickly seizing the central bank’s offer.

Bank intervention in the Spanish bond market could carry conditions from international lenders that Spaniards are unlikely to welcome. The antiausterity protests that continued over the weekend are a stark reminder to Mr. Rajoy of the political cost of accepting the tough terms that often accompany outside aid.

Although Mr. Rajoy holds a parliamentary majority and is unlikely to yield to such pressure from the street, he also faces additional challenges to his efforts to impose tighter fiscal discipline as two of the country’s regions, Basque and Galicia, his home region, hold elections next month.

The political quandary has left Spanish authorities trying to take advantage of lower borrowing costs while seeking the best arrangement with their European and international partners to manage another round of market turmoil if investors lose faith in Spaniards’ willingness to change.

Mr. Rajoy “is taking his cue from the markets and sees a window of opportunity to get as much debt out the door as possible at what are still relatively favorable yields for Spain,” said Nicholas Spiro, a government bond specialist based in London.

Mr. Rajoy is “likely to keep playing for time, partly as a negotiating tactic” to press European lenders to dilute any conditions of a bank-backed bond-buying program for Spain, Mr. Spiro said.

For now, Mr. Spiro predicted that investors will keep buying Spain’s bonds — if for no other reason than to avoid missing the next leg of the market rally if Mr. Rajoy does eventually decide to ask for help and central bank bond buying ensues.

Jack Ewing contributed reporting from Frankfurt, Raphael Minder from Madrid and Landon Thomas Jr. from London.