Euro bailout firewall not big enough

@CNNMoneyInvest June 17, 2012: 3:46 PM ET

NEW YORK (CNNMoney) -- The recent €100 billion bailout of Spain's banks will leave Europe's financial rescue fund without enough money to bail out another big economy, an international banking group warned on Sunday.

"[A]fter committing €100 billion for the Spanish saving banks, the Eurogroup's rescue funds, as currently authorized and structured, will have sufficient funds to help a small economy like Cyprus, but hardly enough to deal with any large country," the Institute of International Finance wrote in report to its members.

The IIF represents more than 450 financial institutions in 70-plus countries. It was the lead negotiator on behalf of the private sector in the restructuring of Greek government debt earlier this year.

On June 9, Spain officially requested as much as €100 billion from the European Union to recapitalize ailing banks. But the move failed to ease concerns about the sustainability of Spain's public debt.

The yield on 10-year Spanish bonds rose last week to 7% -- the highest level since the euro was introduced in 1999. The psychologically important 7% level raises concerns about the government's ability to fund itself and has fueled speculation that Spain will need a bailout.

"Investors evidently think that, welcome as the Spanish bank assistance package is, important measures still need to be taken to address the growth deficit in current policy approaches in many euro area countries," the IIF report states. "Lack of growth would make debt unsustainable in many cases."

Euro area policymakers have made "conflicting statements" about the size of their so-called financial firewall, according to the IIF.

The estimates have ranged from €500 billion to €800 billion. But the group said that "in reality" the European Stability Mechanism will have only €16 billion in "paid-in capital" in the first three months after it launches in July.

Using leverage, this would give the fund a lending capacity of up to €107 billion, according to the IIF. Adding in the remaining funds from another rescue fund, the European Financial Stability Facility, means the EU has a total of €351 billion to lend.

The stability fund has already backed loans for Greece, Ireland and Portugal.

The IIF report was released as Greek voters returned to the polls in a repeat of last month's inconclusive election. Early indications are that no political party in Greece will win enough seats in Parliament to claim a majority. That means the top parties will have to try to form a coalition government, which they failed to do following the last election on May 6.  To top of page

Index Last Change % Change
Dow 16,424.85 162.29 1.00%
Nasdaq 4,086.23 52.07 1.29%
S&P 500 1,862.31 19.33 1.05%
Treasuries 2.64 0.01 0.34%
Data as of 6:18pm ET
Company Price Change % Change
Bank of America Corp... 16.13 -0.26 -1.59%
Facebook Inc 59.72 0.63 1.07%
Yahoo! Inc 36.35 2.14 6.26%
Intel Corp 26.93 0.16 0.60%
Alcoa Inc 13.42 0.37 2.84%
Data as of 4:02pm ET
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.41%4.44%
15 yr fixed3.33%3.31%
5/1 ARM3.34%3.55%
30 yr refi4.39%4.41%
15 yr refi3.31%3.30%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.