MADRID, Oct 2 (Reuters) - The European Union must do more toget credit flowing in Spain and other southern member states, EUEconomic and Monetary Affairs Commissioner Olli Rehn said in aninterview published on Wednesday.
Spain's economic prospects are improving "modestly", Rehntold Spanish newspaper Expansion, and that should lead to agradual recuperation in credit, but this must be supported bypolicies.
"I am referring to the banking union, which will bring backconfidence to the financial sector, possible decisions by theECB and the European initiative with the EIB to boost loans toSMEs," he said.
"I kindly ask member states to take a strong and coherentposition in favour of this initiative to unblock the worstbottleneck for economic growth, especially in southern Europe,where credit conditions are too strict for small and mediumenterprises in Spain, Italy and other countries."
The European Central Bank concludes its monthly meeting onWednesday, with investors looking for any new hints on whetherit could offer new long-term unlimited loans to banks (LTROs) tokeep banking liquidity ample and short-term interest rates low.
Debt held by Spanish companies dropped for the 29th straightmonth in August to the lowest level since March 2007, with thecredit crunch hitting small businesses particularly hard,according to Bank of Spain figures.
He did not give any details on what the initiative wouldconsist of.
Countries should be supported by the European Union's movetowards banking union, as well as possible action from theEuropean Central Bank (ECB) and the European Investment Bank(EIB).
Rehn reiterated that Spain may not need further aid for itsfinancial sector after a 41 billion euro ($55.45 billion)bailout last year.
"It seems to me that Spain is in a position where it ismanaging that alone and will not need more programmes once thisone expires," Rehn told Expansion.
The commissioner said the biggest risk he saw for Spanishbanks was the economic situation, though if it evolvespositively, as expected by the government, there will be no needfor dramatic recapitalisation of entities in the country.
Spain's recession-plagued economy is expected to have grownfor the first time in two years in the third quarter, accordingto government estimates, lifted by strong exports as companieslook abroad to offset losses due to dire demand at home.
Rehn also said that Spain's 2014 budget, presented earlierthis week "seems to be based on reasonable scenarios andestimates at first glance". A more detailed analysis will bepresented in mid-November.
He urged Spain's government to focus on cost-cutting andavoid raising taxes, after a series of increases, including onincome tax and value-added tax (VAT).
"New tax raises would have a very damaging effect on theeconomy," Rehn said.
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