Europe’s Crisis Focus Shifts From Greece to Spain

Greek polls support bailout; Spanish banks teeter; Vatican scandal grows

The EU parliament in Brussels. The EU parliament in Brussels.

Concerns eased a bit over the possibility of a Greek exit from the euro zone as Saturday polls showed rising support for pro-bailout parties in that country. However, attention turned to Spain as earlier estimates of funding needed for a bailout of its largest bank looked to be seriously undervalued.

Bloomberg reported Monday that investor optimism carried over to early markets on the results of polls in Greece that showed pro-bailout party New Democracy showed a strong gain over Syriza, the anti-austerity party that had been showing strong support last week in the wake of cuts in everything from pensions and pay to health care.

Greek voters apparently were becoming increasingly concerned over the possible repercussions of a vote against austerity conditions as even International Monetary Fund (IMF) chief Christine Lagarde showed little sympathy for the country. Lagarde was quoted saying in a Guardian article that African children needed more help than Greeks who were “trying to escape tax all the time.”

She was not alone in her criticism. Juergen Fitschen, the incoming co-CEO of Deutsche Bank AG, was quoted saying in a Friday speech, “Greece is the only country, I feel, where we can say it’s a failed state, it is a corrupt state, corrupt as far as its political leadership is concerned and obviously other people had to be willing to support this.”

Lagarde did say in Sunday comments on Facebook that she sympathized with Greece, and stressed that the wealthy must pay their fair share of taxes.

Contingency measures in other countries continued, since the next Greek election is still many days away. Home Secretary Theresa May of the U.K. said that, should the crisis escalate and result in a surge of migrants, Britain might institute emergency immigration controls.

Richard Ward, CEO of Lloyd’s of London, said that the firm had a contingency plan to switch to multicurrency settlement from euro underwriting if Greece gives up the euro in a return to the drachma.

In Switzerland, Thomas Jordan, president of the Swiss National Bank (SNB), said that a government-led panel was considering controls on capital inflows should the situation deteriorate and result in a flight to the currency.

“The working group focuses mainly on instruments to combat the franc strength based on a joint approach of the government and the central bank,” he was quoted saying in an interview Sunday with Bloomberg. “We also need to be prepared for the possibility of the currency union collapsing, even though I don’t expect it.”

Meanwhile, as Athens and its problems may have stepped back a pace, Spain edged back into the limelight as its bank problems escalated.

On May 11, Economy Minister Luis de Guindos said that the terms of a law tightening provisioning rules, his second in three months, to bail out the country’s banks would cost taxpayers less than 5 billion euros ($19 billion). That same week BFA-Bankia was nationalized. On Friday Bankia said it was taking 8.5 billion euros in addition to those required by the two decrees, and sought a 19-billion-euro state bailout—more than de Guindos estimated was needed for the country’s entire industry.

Prime Minister Mariano Rajoy has been insisting that Madrid will not seek a bailout to help it through its banking crisis, but the situation looks increasingly grim. The country has only 5 billion euros available in its bank rescue fund, and, according to Spanish newspaper El Pais, it plans to infuse public debt instead of cash directly into Bankia Group to cover the cost of the bank’s recapitalization and thus manage not to have to go to market to seek funding. The newspaper did not cite a source for its information.

“They’ve done two reforms already and there will probably be more; I don’t know how many more,” Javier Diaz-Gimenez, a professor at the IESE business school in Madrid, was quoted saying. “They have zero credibility.”

Daragh Quinn, an analyst at Nomura International, was cited saying in a report on Monday that the total cost to recapitalize all of Spain’s banks, based on Bankia’s example, could total as much as 60 billion euros. “Given the current economic and political uncertainties facing the euro zone, this could see additional pressure on Spain to consider using external funds for the bank recapitalization,” he said in the report.

In a separate crisis, the Vatican spent a turbulent week that included the ouster of the president of its bank and the publication of a book alleging conspiracies among cardinals, and ended with the arrest of the Pope’s butler Paolo Gabriele on charges of leaking documents to the press on financial issues. The new week looked no better, as Reuters reported Monday that at least one cardinal had been alleged to be involved in the scandal dubbed “Vatileaks.”

The Vatican has been struggling to comply with requirements to comply with money laundering laws to make the “white list” of the Office for Economic Cooperation and Development (OECD). Financial transparency is one of the requirements, and, as previously reported by AdvisorOne, the Vatican suffered an embarrassment earlier in the year when JPMorgan Chase closed one of its accounts citing lack of transparency as the reason.

With its bank president, Italian Ettore Gotti Tedeschi, removed by a “no confidence” vote just weeks before the July decision on the white list, the Vatican, said Reuters in a report, could be in for a tough—or at least embarrassing—time. Gotti Tedeschi came to head the Institute for Works of Religion (IOR in Italian) from Spain’s Banco Santander. He claims that he was ousted for pushing for greater transparency, an assertion that is contradicted by Carl Anderson, head of the Knights of Columbus charity group and a member of the board of the Vatican bank.

Anderson, who voted for Gotti Tedeschi’s ouster, claims that the bank president was in fact doing the opposite, and that Gotti Tedeschi was unable to work with senior management at the bank.

Meanwhile, the reporter whose book, His Holiness, was published last week offering allegations that the “princes of the church” were conspiring in power struggles, criticized the Vatican for holding the butler in secluded custody. "Surely, arresting someone and rounding up people and treating them like delinquents to stop them from passing on true information to newspapers would cause an uproar in other countries," said Gianluigi Nuzzi. "There would be a petition to free them."

In the wake of previously leaked documents, including letters from an archbishop who had been transferred to Washington after exposing corruption and cronyism connected to Vatican contracts and documents that revealed infighting about the Vatican bank, the latest news about Gabriele was a surrealist touch; headlines over the weekend trumpeted, “The Butler, With the Documents, in the Vatican.”

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