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Brussels believes Spain should tap EU rescue fund to recapitalize its banks

Commission fears that restructuring underway will fall short

Domestic funding options limited by Madrid's austerity drive

European Central Bank President Mario Draghi said a few months back that European citizens are not ready for another round of bank recapitalization, but there may be an exception: Spain. The European Commission believes the Madrid government should tap the European Union rescue fund to accelerate the government-orchestrated restructuring that is already under way in order to get credit flowing again.

Brussels believes the restructuring plan introduced by the team of Economy Minister Luis de Guindos, which calls for additional provisions of 52 billion euros by the banks to cover possible losses on real estate assets on their books could be insufficient if the crisis drags on. The restructuring is aimed at fomenting further consolidation in the sector, using when necessary injections from the Deposit Guarantee Fund, which is funded by the banks themselves.

The rescue fund seems the best option at present given the problems in raising capital privately and restrictions on the use of public money because of the austerity drive to rein in the country’s deficit.

The Commission feels that Spain should not consider having to tap the fund as a stigma. “There is one possibility, and that is to continue to drag one’s feet, stretching out the process, and that the banks continue not to lend, therefore, stymieing the recovery,” a source in Brussels said. “And there is an indirect way, which is to tap the rescue fund. There are no easy solutions to the crisis.”

The government has rejected the option of seeking a loan from the fund. “But the resources of the Deposit Guarantee Fund are running out, and if there is a sharp fall in house prices, there will be no other option but to inject public funds in the banks,” a market source said.

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