Spanish government committed to guaranteeing bank deposits

Yesterday the Spanish president met with representatives from six of Spain’s largest banks Santander (Alfredo Sáenz), BBVA (Francisco González), Popular (Ángel Ron), La Caixa (Isidre Fainé), Caja Madrid (Miguel Blesa) and Unicaja (Braulio Medel).

Following the meeting Zapatero repeated the government’s commitment to guaranteeing the solvency of Spanish Banks despite widespread panic in the European banking system and sharp falls in world stock markets. Confronted with the risk of being left behind decisions made by other EU states he announced measures that would protect both the liquidity of Spanish Banks and their customers. He also said that if agreement among EU states wasn’t reached he would act unilaterally to protect Spain’s interests.
The options discussed included guaranteeing bank deposits with immediate effect and to make a commitment to injecting liquidity into the Spanish banking system before any of them are seriously affected and therefore avoid repercussions in the Spanish economy.

Zapatero faces a difficult week and will be meeting with the leader of the PP main opposition party, Mariano Rajoy, business leaders and also union representatives. He will also be meeting with the French president who excluded Zapatero from a meeting with Germany, British and Italian leaders last week which aimed to look for solutions to the present global financial crisis with little apparent success.

The agreement reached yesterday between the banks and the government is not as straightforward as it may seem at first sight. Firstly a figure, currently 20,000 euros, guaranteed by both the banks and the government needs to be agreed although another figure which could be above 40,000 euros previously proposed by Brussels could be agreed.

Furthermore, Spanish banks are worried about unilateral decisions which could provoke large scale transfers of money from one country to another.

As far as liquidity is concerned the proposed solutions are even more complicated. The government will put forward a proposal for the European Central Bank (ECB) to inject funds over two or three years into the European banking system. The ECB has been injecting money since the beginning of the crisis with thousands of millions of euros but over a very short term. It has conceded loans that banks must return over the matter of weeks or six months at the most. However, given the seriousness of the crisis these measures do not appear to be sufficient.

However, if the European Central bank, under Jean-Claude Trichet does not take on board the proposal mentioned above the Spanish government has looked at other emergency measures such as the Treasury buying up mortgages, the issuing of Bonds, bank guarantees or other formulas to avoid the banking system collapsing all together.

In fact, Alfredo Sáenz proposed a similar solution to the UK which has used public funds to prop up some of the largest mortgage lenders in the country.

Yesterday’s meeting surprised some people not least for the obvious absences the most obvious being Pedro Solbes, Minister for the Economy who was attending a summit meeting in Luxembourg. The governor of the Bank of Spain, Miguel Ángel Fernández, was also absent as well as the president of Santander bank Emilio Botín who was also away on business.

Some sources in the banking sector have criticised the government for holding yesterday’s meeting fearing that other countries might interpret it as meaning that the Spanish banking system is on the point of collapse like in many other EU countries.