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EU: IMF fears 'credit shock' in Spain if Rajoy blocks rescue
The Telegraph ^ | 10/10/2012 | Ambrose Evans-Pritchard

Posted on 10/10/2012 10:58:45 PM PDT by bruinbirdman

The International Monetary Fund has issued a veiled warning that Spanish bond spreads could surge to a record 7.5pc and push the country into a deeper crisis if premier Mariano Rajoy continues to drag his feet on a bail-out request.

The fund said sovereign debt woes were spilling into the broader Spanish economy, risking a “pernicious feedback loop” for private companies. The danger is another bout of capital flight combined with a “credit shock” as banks deleverage drastically to meet higher capital ratios.

Olivier Blanchard, the IMF’s chief economist, said Madrid was courting fate by trying to muddle through without a bail-out – and without the tough terms it would bring – now that borrowing costs had fallen on hopes of bond purchases by the European Central Bank.

Mr Blanchard said investors had most likely anticipated a rescue by the ECB and the European Stability Mechanism (ESM). “If so, we can’t be sure that yields will stay low for much longer,” he said.

The IMF said capital flight from Spain reached €296bn (£238bn) in the 12 months to June, or 27pc of GDP. It matches the intensity of “sudden stop” crises seen in emerging markets.

Banks in Spain, Italy, and the EMU fringe cannot easily make up the shortfall by turning to the ECB because they are short of usable collateral.

The biggest risk is that Europe’s banks will have to slash balance sheets by €4.5 trillion by the end of 2013, largely concentrated in the Club Med bloc.

The fund said Europe’s failure to flesh out promises for a banking union – needed to break the “vicious circle” between banks and states – risked a violent credit crunch, slashing an extra 4pc off output in southern Europe next year. Most economists say a shock of

(Excerpt) Read more at telegraph.co.uk ...


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1 posted on 10/10/2012 10:58:51 PM PDT by bruinbirdman
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