💾 Archived View for gmi.noulin.net › mobileNews › 4010.gmi captured on 2023-06-16 at 19:06:18. Gemini links have been rewritten to link to archived content

-=-=-=-=-=-=-

Spain's banks - Just don't call it a bail-out

2012-06-12 05:43:32

Jun 10th 2012, 19:30 by F.M.-B. and G.T. | MADRID

WHATEVER the 100 billion ($126 billion) made available by euro-zone countries

to recapitalise Spain's banks looks like, the Spanish government would really

rather not call it that. "In no way is this a rescue," said Luis de Guindos,

Spain's economy minister, while announcing that a deal to rescue Spain's banks

had been done in a two-and-a-half-hour conference call with the 17 euro-zone

finance ministers on June 9th. "It's a loan with very favourable conditions."

The prime minister, Mariano Rajoy (pictured above), who left his underling to

front the bail-out, was meanwhile busy giving the impression that all was

proceeding as normal. When he eventually appeared before the press the

following day, Mr Rajoy made repeated reference to "what happened yesterday",

as if the rescue were an embarrassing incident that, out of politeness, ought

not to be mentioned by name. Then he flew to Poland to watch some football.

This was understandable, given the importance of confidence to banking, if

slightly comical. Yet it was also emblematic of Spain's approach to its banking

crisis, characterised by a mixture of bluster and denial that has ultimately

proved to be self-defeating. The good news is that this loan signals that the

country is at last facing up to the problems in its banking sector. A hundred

billion euros is at the high end of what most analysts estimate is required and

should be enough to protect Spanish banks against further shocks.

The government said it would specify how much money the banks needed after it

received an assessment from two independent consultancies, Oliver Wyman and

Roland Berger, due by June 21st. The loan amount is more than double the 40

billion capital hole identified late on June 8th by a report from the

International Monetary Fund, though the IMF had warned Spain would need an

additional buffer on top of this amount. Last week Fitch, a rating agency, said

Spanish banks might require 50 to 60 billion in fresh capital, or up to 100

billion if things became really bad. The government needs to request enough

money to persuade markets that it will not underestimate needs for a third time

as it did with provisioning orders totalling over 80 billion in February and

May, which have proved insufficient.

The bail-out will be channelled through the state-backed bank bail-out fund,

the FROB (Fund for Orderly Bank Restructuring), and so will count as sovereign

debt. If used in total, it would add about 10% of GDP to Spain's debt burden.

Even then, the debt to GDP would probably peak at below 100% in 2015. This is

still less than other highly indebted countries in the euro zone.

Yet several details of the bail-out are still fuzzy. First, it is not clear

exactly what conditions would be attached to the aid. The government claimed

there were no conditions for the rest of the economy. Other European ministers

might disagree. The Eurogroup praised Spanish reforms but said it would also be

monitoring deficit procedure and structural reform carefully. "Progress in

these areas will be closely and regularly reviewed also in parallel with the

financial assistance," in their words. The Eurogroup also mentioned "horizontal

structural reforms of the domestic financial sector", which could mean

something.

Second, the Eurogroup did not specify whether Spain would be borrowing from the

existing rescue fund (the European Financial Stability Facility or EFSF) or

from the new European Stability Mechanism which is due to start in July. This

matters because loans from the EFSF are not senior to other bondholders,

whereas the ESM loans do have priority over privately held debt. A loan from

the latter could spook investors in Spanish sovereign bonds.

How will the bail-out affect Spain's ability to borrow in the markets? Cleaning

up the banking system would be a positive step but it is not enough on its own.

The country's economy is expected to shrink this year and the next. The bank

bail-out is unlikely to reverse the downward momentum, even if it eases the

country's credit crunch. If Greece leaves the euro, it is possible that Spain

will find itself shut out of the markets.