Spanish banks to get bailout. Spain left holding the bag.
Markets may not be impressed with Europe's latest rescue of Spanish banks, because the bailout will increase the liabilities of the Spanish government by up to 鈧�100 billion.
Markets may not be impressed with Europe's latest rescue of Spanish banks, because the bailout will increase the liabilities of the Spanish government by up to 鈧�100 billion.
Picasso once described art as 鈥渁 lie that makes us realize truth.鈥� The same might be said about the art of European policy-making at the moment.
European officials shouldn鈥檛 be surprised if their latest unveiling鈥攁 rescue plan for Spain鈥檚 troubled banks鈥攆ails yet again to impress markets or resolve the continent鈥檚 crisis. After all, whatever the package of up to聽鈧�100 billion in loans聽might do to calm fears about Spain鈥檚 banks for the time being, it may only increase concerns about the health of the sovereign itself.
聽Because the panoply of European and supranational institutions like the聽International Monetary Fund聽can't lend to banks directly, they will effectively be lending money to Spain to inject into its banks instead. Indeed, Dow Jones, citing a European official, reports that Spain鈥檚 bailout fund (the Fondo de Reestructuracion Ordenada Bancaria, or FROB) will borrow funds from the euro zone鈥檚 temporary Emergency Financial Stability Facility, or聽EFSF, at least until the permanent European Stability Mechanism fund is up and running.
聽What all the fancy-sounding acronyms in the world can鈥檛 obscure is the fact that Spain will effectively be on the hook itself for whatever sum is borrowed to bail out its banks. As Morgan Stanley economist Joachim Fels put it in a client note Sunday, 鈥渁 loan by the EFSF or ESM to the Spanish bank restructuring fund, FROB, hardly counts as a circuit breaker as it raises the Spanish government鈥檚 contingent liabilities.鈥�
聽And 鈧�100 billion is no chump change. It amounts to nearly 10 percent of Spain鈥檚 gross domestic product; the country last year was already running a deficit of about 9 percent of GDP. It isn鈥檛 clear how much of this sum will be borrowed up front, but it is clear that increasing Spain鈥檚 debt load at a time when its recession is still deepening is hardly a way to shore up investor confidence in the nation or the broader euro zone. In fact, such a transfer of private-sector debts to the public sector (which then triggers further austerity measures) has perhaps been one of the biggest missteps of the crisis; it hardly seems prudent now to double-down.
聽A Pyrrhic victory it will certainly be if Spain鈥檚 banks get help at the cost of further eroding the solvency of the sovereign or the sustainability of the euro zone. Only true political and fiscal union鈥攑utting the full bloc鈥檚 pocketbook behind struggling nations like Spain鈥� is likely to shore up investor confidence. If it appears that the bailout for Spain鈥檚 banks is but one small step in that larger direction, then investors might give Madrid鈥檚 latest maneuver the benefit of the doubt. If not, Europe鈥檚 crisis remains unfinished.