German Parliament to vote on Spanish bank rescue

[July 20, 2012]  BERLIN (AP) -- Germany's finance minister urged lawmakers Thursday to support a rescue package worth up to (EURO)100 billion ($122 billion) for Spain's ailing banks, arguing it was necessary to help the country cope with "excessive" market fears and prevent the eurozone's debt crisis spreading further.

Germany's Parliament has to endorse all decisions to use money from the eurozone's rescue fund. The country is Europe's biggest economy and the biggest single contributor to the bailout fund; it will guarantee loans to the tune of up to (EURO)29 billion under the Spanish package.

Bailing out struggling eurozone nations isn't popular in prosperous Germany and helping banks is even less so, but officials argue that stabilizing Spain's banking sector -- which has been hit hard by a burst real-estate bubble -- is in the country's own interests.

Finance Minister Wolfgang Schaeuble argued that the Spanish government itself is on the right path, pushing through unpopular austerity measures and reforms to get its finances in order. But it needs help to cope with losses at its banks -- investors fearing the Spanish government may be overwhelmed by such costs have pushed its borrowing rates high.

"Because of the weakness of some Spanish banks, the financial stability of the eurozone as a whole is threatened in a generally uncertain market environment with high interest rates for Spanish government borrowing," Schaeuble said.

"A quick restructuring of struggling Spanish financial institutes is important to secure the Spanish state's capital market access at manageable interest rates and prevent contagion effects on other countries in the eurozone," he added.

Spain has the 17-nation eurozone's fourth-biggest economy, far bigger than those of the three countries -- Greece, Ireland and Portugal -- whose governments have been bailed out.

"Without the extreme uncertainty on the financial markets, Spain would be in a position to get its banking sector in order on its own," Schaeuble told lawmakers. "But ... in this exceptional situation, we are helping the Spanish state against the financial markets' excessive nervousness and, in doing so, we are contributing to preserving the eurozone's overall financial stability."

The Spanish aid application looked set to win a broad majority in Parliament, with the two main opposition parties signaling that they would vote in favor.

Lawmakers met in a special session because their summer break started at the end of June and they weren't scheduled to reconvene until Sept. 11.

The aid initially will come from the eurozone's current, temporary rescue fund, the (EURO)440 billion European Financial Stability Facility. The permanent, (EURO)500 billion, European Stability Mechanism is to take over when it's up and running -- which won't be before September.

European leaders agreed at a summit last month that the ESM will eventually be able to funnel money directly to stressed banks -- rather than to governments -- once an effective European banking supervisor is set up. But Schaeuble stressed that in Spain's case the money will go to the government, which will be liable for repaying it, and that talk of direct bank aid is a question for the future.

A group of German economists recently denounced the summit's decisions, arguing that they risk increasing the exposure of taxpayers, retirees and savers to the debts of struggling banks. The government has rejected that criticism.

"Anyone who talks now about an imminent use of the ESM to recapitalize banks directly, or of collective liability for the debts of banks in the euro system, is waffling," Schaeuble said.

[Associated Press; By GEIR MOULSON]

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