Everyone expects the Spanish Intervention
- 29 May 2012
Ambrose Evans-Pritchard in today's Daily Telegraph points out that for all the denials from politicians that external help is unnecessary, the large – and increasing – cost of bailing out the banks has to come from somewhere and, to be blunt, the Spanish government hasn't got it.
"Spain must somehow rustle up €20bn or more on the debt markets. This will push the budget deficit back into the danger zone, though Madrid will no doubt try to keep it off books – or seek backdoor funds from the ECB to cap borrowing costs. Nobody will be fooled."
He calls the plan to slash the budget deficit from 8.9% to 5.3% 'lunacy' given the current unemployment levels. He adds: "Either Europe puts a stop to this very quickly by mobilising the ECB to take all risk of a Spanish (or Italian) sovereign default off the table – and this requires fiscal union to back it up – or it must expect Spanish patriots to take matters into their own hands and start to restore national self-control outside EMU."
Elsewhere it is being suggested that €20bn may be too conservative. Business Insider cites reports from Spain's El Mundo that the country made need tens of billions on top of the €19bn already spent on Bandia:
"Spain may need another €30bn to clean up its banking system on top of the €19bn required by Bankia according to El Mundo. The money would be split along the following lines: €10bn for a balance sheet cleanup and €20bn to raise capital levels, citing government sources."
A number of commentators on the Telegraph site asked, not unsurprisingly, what would happen if Bankia – and possibly others – were allowed to fail. Peter Snelson said 'pain now and not later'. This may be simplistic, but plenty of people simply do not understand why bad banks continue to receive taxpayer cash.
bcntrends on the The Financial Times site points out that Spain is already receiving outside help; "Intervention in Spain has already started. Spanish banks borrowing at 1% from the ECB, and buying Spanish government bonds at 6%. How is the government going to act against the institutions that have kept it alive? It's a disgrace to see such savage cuts in education and healthcare whilst injecting billions into the banks. Let the banks fail. Spain is a smoke screen, and the sooner the EU and the IMF intervene, the better."
The trouble is, the markets care more about the banks than they necessarily do about the countries themselves, which is why they responded so positively to the LTRO. And it is the markets that are currently pushing up Spanish funding costs to unsustainable levels – 6.5% at last count and rising.
However, it may be that external help is not the only solution. Even Ambrose Evans-Pritchard reckons that Spain has not yet exhausted all its options. The Irish believe that there is something to be learned from their example. They set up a 'bad bank' to house toxic assets – the National Asset Management Agency.
"We are here, we are a working model. Anyone who wants to come and talk to us, we are open to that," Frank Daly, chairman of NAMA, told the Financial Times.
"I always believe you should face up to your problems and identify them as early as you can and kicking the can down the road is not a productive way to go. It is up to other countries, and it is up to Spain in particular, to decide what they want to do."
Robert Peston works through some of the potential solutions here including – potentially – a deposit protection scheme: "If, as seems likely, the Commission says quite soon that it is full steam ahead to the creation of a pre-funded scheme that would give retail depositors across Europe the confidence that their savings up to 100,000 euros are safe, that might well be a good thing in the long term."
He believes that this does not address the real risk to depositors, which is that the value of their savings could halve in a devaluation.
Shaun Richards has short shrift with this plan: "Spain has learnt absolutely nothing from the Bankia failure as she is floating on the newswires a plan to merege 3 cajas or savings banks ( Liberbank, Ibercaja Banco and Banco Cajatres). For those unaware Bankia was the product of a merger of 7 cajas. I understand repeating successes but utter failures?"
A crisis in Spain has always been the biggest worry for Eurozone policymakers. Its current situation suggests Europe is reaching an endgame.
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