THE RAMIFICATIONS OF THE SPANISH BANKING BAIL-OUT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

Some important details are still lacking with regard to the Spanish banking bailout plan: its final amount, which is going to depend on the results of the audit commissioned by the government; its rate, which we will be coming back to; and the stabilizing measures for the banks which will be associated with it. These will include massive lay-offs in the banking sector and will further worsen the unemployment situation.

One other aspect has, however, not been highlighted enough. The funds will have to be paid out – at least initially – by the EFSF, which itself will borrow them on the financial markets using the guarantees of its members (which include that of Spain itself). It remains to be seen under these conditions, at what rate the EFSF will be able to borrow in order to then lend on to Spain. The whole of the edifice will be further weakened, with the guarantees relying de facto on an increasingly limited number of countries.

Contrary to the Spanish request, supported by several countries, the bank rescue package is going to pass through the state’s coffers, whose deficit will therefore be increased by the same amount. The guarantee that the State will give to the EFSF for its own rescue will be added on too! Not only will there be no additional separation of public and private debts, but they will be even more interconnected. The opposite of what everyone knows ought to happen.

The Spanish government has announced that it wants to continue its bond issues as planned, in a market which has only eased off slightly. It is also going to have to finance the regional debt, which it has not managed to rein in. The hole identified in the bank finances can only keep on getting bigger as the recession deepens. A second bail-out plan is inevitable, even if this is delayed until the activation of the ESM, still pending its ratification by the Bundestag.

The ramifications of the adopted bail-out do not stop there. The Irish government has already announced that it wants to benefit retrospectively from the same arrangements as the Spanish, which would mean the reversal of numerous austerity measures. In Greece, Syriza sees in the made-to-measure design of the Spanish plan an additional justification of its attempt to have the current memorandum cancelled, plus a renegotiation of the terms of the financial intervention engineered by the Europeans and the IMF. Lastly, a precedent has been created, which may inspire the next in line, Italy, to demand a tailored rescue package when their turn comes.

For if the situation in Italy is different to that of Spain’s, notably due to the absence of the gigantic real-estate bubble which exists in Spain, the extent and the structure of the debt is particularly worrying. Though its bond rates are slightly lower, they are closely linked to those of Spain, and the Italian government has only partially completed its planned bond issues – its practice of issuing predominantly short-term securities making it vulnerable to the current rise in rates. Italy has also fallen into recession and Moody’s has already lowered the note of its principal banks, as they seek to reinforce their capital ratios. Finally, the reforms engaged upon by Mario Monti are arousing a growing discontent in the country, whilst the political parties- which have been sidelined- are trying to work their way back onto the scene.

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