Irish finance minister responds to request to provide estimate of overall Spanish bailout needs

Although Spain might be in the eye of the storm right now, with the interest rate demanded by potential lenders to Spain soaring to a record 6.8% yesterday for 10-year loans, Ireland’s “issues” haven’t gone away even if they are no longer centre-stage. When Ireland’s first bailout concludes at the end of 2013, Ireland still faces uncertainty about where it will source funding of nearly €40bn in 2014-2015 to pay for its deficit and maturing debt – the hope was that Ireland would return to the traditional bond market, but with each passing week, that prospect is looking less-and-less promising and the betting is that we will need official funding, or in common parlance “a second bailout”. And it is the European Stability Mechanism that has been touted as the only feasible official source of funding. So for Ireland, it is of paramount importance that this fund has enough cash to deliver a second bailout – after all, that was the main plank on which the “Yes” side argued in the recent Fiscal Compact referendum.

So you would think it was a perfectly reasonable request when Independent TD Stephen Donnelly asked the Minister for Finance, Michael Noonan for an estimate of Spain’s financing needs over the next three years. After all, if Spain is locked out of the bond markets as one of its own ministers claimed last week, and if its bond yields are at 6.8% when official funding is apparently available for 3-4%, and if Spain has substantial immediate financing needs, then it would seem logical that Spain would seek official funding now. And the worry for Ireland would be that at the end of 2013 when our first bailout concludes, the cupboard will be empty. A matter of high national import, some might say.

Here was the question and answer exchange from the Dail yesterday:

“Deputy Stephen Donnelly: To ask the Minister for Finance if he will provide an estimate of the funding requirements of Spain to cover a three year period and to include deficit funding, repayment of maturing debt and recapitalising banks should that country seek to access official sources of funding..

Minister for Finance, Michael Noonan:  As the deputy will be aware, it was clarified over the weekend that Spain is to seek official sources of funding.  In particular, financial assistance is being sought from euro area Member States for the recapitalisation of Spanish financial institutions.  Finance Ministers in the euro area have welcomed this and have expressed their willingness to respond favourable to the request.

Financial assistance is to be provided by the EFSF / ESM and is to cover all possible capital requirements which will be estimated by the external audit that is currently taking place.  The loan amount to cover the estimated capital requirements with an additional safety margin is estimated as summing up to €100 billion in total.

Spainwill continue to fund its sovereign needs via market based financing.”

So Minister Noonan and the Department of Finance either don’t know the answer – which is quite possible, remember this Department has a reputation for being economically illiterate – or they do, and they don’t want to spook the nation by revealing there may not be anything left in the ESM for Ireland at the end of 2013.

Of course, we can have our own stab at Spain’s financing needs ourselves by examining:

(1) Spain’s deficit. The EU recently published its Spring economic forecasts for all EU countries and it would seem on here that Spain will need about €100bn over the next three years to fund its deficit which is nasty at 6.4% estimated in 2012 and seems to be on a growing trend in a country with 24% unemployment, 90% debt:GDP, a property and banking sector where there is evidence of denial of the real extent of problems and an uncompetitive economy.

(2) Spain’s roll-over of maturing debt. Spain owed €785bn at the end of 2011. It is estimated that Spain still needs to refinance over €100bn this year and as for 2013-2015, it is remarkably unclear what the funding profile is, but if you assume €80bn per annum, then Spain might need €340bn over the next three and half years.

(3) Spanish banks. Although we still await details, it seems that Spain has initially requested up to €100bn to deal with immediate losses and provide a buffer for future losses. But losses will depend on a number of variables including the decline in property values. Spanish residential property is down by nearly 25% from peak. In Ireland, the official estimate from the CSO is that our property is down 50% from peak, though other estimates which include consideration of cash-only transactions suggest we are down 60% from peak. There are parallels between the Irish and Spanish construction boom in the 2000s and both generated over-construction, and the view on here was that there was similar over-production. Should Spanish residential property decline by 50% from peak, with present levels of macro-economic distress, its banks may be looking at losses around €250bn or 25% of its GDP.

There is presently some €250bn potentially available from the EFSF which thankfully Ireland is no longer contributing to – it is being funded by lenders who are receiving guarantees from other EZ countries. The ESM is supposed to have a €500bn lending capacity once the 17 EZ countries have contributed €80bn in capital –Ireland’s share is €1.3bn. So it would seem that Spain alone might eat up all remaining available official sources of funding.

Italy’s 10-year bond closed at 6.2% yesterday and if Italy needs tap official funding as was suggested yesterday by Austria’s finance minister – “Italy has to work its way out of its economic dilemma of very high deficits and debt, but of course it may be that, given the high rates Italy pays to refinance on markets, they too will need support”, then it would seem almost certain that existing mechanisms will not be adequate and on a parochial level, Ireland will be unable to fund itself from the end of 2013. Serious stuff, deserving a better response than the one provided by Minister Noonan yesterday.