–Washington Meeting Follows Tsy Official’s Meetings in Madrid

By Denny Gulino

WASHINGTON (MNI) – Spain’s deputy prime minister has been called
the most powerful woman in the conservative government and her meeting
Thursday afternoon with Treasury Secretary Tim Geithner is occurring
amid world speculation about whether Spain will try to access the
capital markets to recapitalize its ailing banks.

The Treasury Department has so far had no comment on the meeting
other than to announce it is happening, one day after Treasury Under
Secretary Lael Brainard met with government officials in Madrid.

Deputy Prime Minister Maria Soraya Saenz de Santamaria is also
meeting with IMF chief Christine Lagarde in the afternoon.

IMF spokesman Gerry Rice, in his regular biweekly press briefing,
appeared to dampen any speculation the Fund is gearing up for any
combined European-IMF capital injection, saying, “I can tell you the IMF
is not drawing up plans that involved financial assistance for Spain,
nor has Spain requested any financial support from the IMF.”

Nevertheless, a Dow Jones story cited sources saying the IMF’s
European Department is drafing contingency plans in the event Spain
needs support. And reports suggest perhaps Spain is lobbying the Fund’s
most influential member, the United States, to help make it happen.

In any event, no IMF confirmation would be expected until after a
formal request was delivered, and no formal request would be likely
until the U.S. assured Spain of its support.

With market trepidation about Spain seen chiefly responsible for
the record-low yield for Treasury’s 10-year note, now in the area of
1.58%, the same anxiety is pushing up the other end of the rate see-saw,
Spanish borrowing costs, to spreads more typical of countries in need of
a bailout. Earlier in the day the yield on the German two-year, the
Schatz, which has also been the beneficiary of safe-haven flows, briefly
dipped into negative territory.

Spain has made explicit its intention to support freshly
nationalized Bankia SA but has not made clear where the nearly $24
billion it says is necessary for that one institution would come from.
The country’s 2009 bailout fund is about three-quarters depleted, at
about 5 billion euros. Market participants wonder if other Spanish banks
will also need help, and where those additional public funds could be
found.

The Institute of International Finance has estimated the additional
funds could amount to more than was in the original bank bailout fund.
IIF Managing Director Charles Dallara told a Dutch newspaper that the
Spanish government needs to cut its ties to the banks, not seek any
private sector relief as did Greece. He also urged European regulatory
authorities to extend the deadline for stiffer bank capital requirements
that occurs at the end of next month.

The IMF has already scheduled a review of Spain’s economy to begin
next week and any final determination of an IMF role would likely wait
for its completion. In addition, an IMF study of Spain’s banks is
pending for June 11 and an internal government bank audit is under way
that may already be spelling out the true state of affairs for
government officials.

But Saenz de Santamaria also is scheduled to attend the private
Bilderberg Club meeting over the weekend in Chantilly, Virginia, just
outside of Washington, which may after all be the primary reason for her
visit.

The group’s website said other attendees include Bank of Canada
Gov. Mark Carney, Irish Finance Minister Michael Noonan, Polish Finance
Minister Ali Babacan, Netherlands Prime Minister Mark Rutte, Turkey’s
deputy prime minister for economic and financial affairs, and China
Deputy Foreign Affairs Minister Ying Fu, as well as numerous business
executives, think tank academics and journalists.

Saenz de Santamaria has been in that job only since December, but
before she was elevated to Cabinet rank, she was the People’s Party
chief spokesperson and the frequently seen face of the government. In
Spanish media, she has been credited with being the most powerful woman
in the government, a view not only of her own prowess but of how few
other women are in senior roles.

For a country mired in repeat recessions, with this year’s forecast
for more of the same, an unemployment rate in double digits and seeing
increasing capital flight, Spain has this week rivaled Greece as the
main European economic challenge.

With some opinion polls showing Greece sentiment evolving back
toward tolerance for the austerity necessary to preserve its
participation in the eurozone and still more than two weeks to go before
its next elections, the focus on Spain has intensified.

Earlier in the day, Fitch ratings downgraded eight of Spain’s
autonomous regions, spotlighting their own intractable debt problems.

** MNI Washington Bureau: 202-371-2121 **

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