LONDON (MNI) – Ratings agency Standard and Poor’s said today
that Spain’s banking system, with a couple of exceptions, is dependent
on liquidity support from the ECB and would be vulnerable if the central
bank began to normalise policy.

“Spanish banks are vulnerable, they are reliant on ECB liquidity,”
said Blaise Ganguin, Chief Credit Officer at S&P said at a press
conference here.

“There are two big questions in regards to the ECB. One is when
will they begin to wean the banks off special funding measures?” Ganguin
told Market News International after the conference.

Ganguin said the ECB could increasingly find itself in a ‘Catch-22
situation’ in which growth in the peripheral eurozone states remains
weak but core eurozone countries continue to grow strongly.

“Then we would see inflationary pressures but a weak periphery –
what could the ECB do then? We could see more focused funding for
institutions as opposed to the blanket funding we are seeing now.

Ganguin also highlighted the retirement of Jean Claude Trichet as a
potential risk to banks, especially if the ECB appointed a more
‘orthodox’ president.

“When Trichet retires we could see the ECB returning to just
targetting inflation. What they have been doing over the last couple of
years is not just targetting inflation. That could be a risk for banks,”
Ganguin said.

Turning to the present and previous bond-buying programs, Ganguin
said he expected the ECB and other eurozone central banks to remain
supportive when trouble hits.

“We assume that central banks continue to be supportive or continue
to show themselves to be supportive. The important thing is, from our
standpoint, is really to look at the way the EU will shape over time –
it was never a straight road,”

“The EU will get together to support the more vulnerable countries
but which way it will take is really not sure.”

“We would like to have more clarity on the mechanism (EFSF) that
has been put in place, particularly on its permanence and that a
solution that is not a short-term incentive for short-term funding,” he
added.

–London newsroom: 4420 7862 7491; email: wwilkes@marketnews.com

[TOPICS: M$X$$$, M$$EC$]