Jose Vinals, director of the IMF’s monetary and capital markets department, spoke with Bloomberg Television’s Margaret Brennan today and said that the European Stability Mechanism (ESM) should be able to put capital into banks without going through national governments to “de-link the sovereign and banking risk at the national level.”
Vinals also warned against getting “caught into a wave of pessimism by recent market data” even if the “situation is uncertain” in countries like Spain and Italy.
Excerpts from the interview can be found below, courtesy of Bloomberg Television.
On the strain on Spain right now:
“I do not agree on the premise that it is not a question of if and when. I think the Spanish authorities are taking very important measures in the areas of labor reform, financial reform, and in the areas of bringing under control the public finances of the regions. And all of these are big improvements in medium-term fundamentals. I think the situation is uncertain in terms of financial markets. And not only countries like Spain, Italy, and so on and need to do the job. There are also steps need to be taken at the European level to fully stabilize the situation.”
On how much longer Spain will be able to access market funding:
“I think that Spain has already refunded in terms of public debt about 50% of the total needs for a year. That is not a concern. The concern is that the access may be more expensive than it should. But perseverance with the right policies at the national level and the European level is something that over time should be rewarded. So we should not be too much caught into a wave of pessimism by recent market data. We should look for work and keep doing the right thing.”
On what kind of situation would warrant a recapitalization:
“This is something that we would like the firewall to do, the European Stability Mechanism. It already has the capacity to put money into banks, but only going through a national government. The ESM lends to the national government, and the national government puts the money into the bank if needed. We think the ESM should have also the ability of putting capital directly into banks without having to go through the national government in order to delink the sovereign and banking risk that the national level.”
On whether there’s a need to do that right now:
“No, I do not think there is a need to do that. I think that in the case of the country you’re talking about, which is Spain, there was today some data released by the Spanish authorities, which after strong scrutiny of the banks basically claim that banks can do a very large part of what is needed in terms of provisions and in terms of capital. They are already doing that. There is a national backstop which still has resources that could be tapped in order to provide further help if that were to be needed. So let’s go step by step and not speculate on the things which are not under discussion nowadays.”
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