TREASURE HUNT, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Following the clues for the next bail-out of the Spanish banks is proving to be a veritable treasure hunt. To participate, follow the guide!

Initially, the EFSF (European Financial Stability Facility) is going to borrow funds on the markets, using the member states guarantees, in order to lend them to the Spanish Government, which will subsequently lend them to the banks for the bail-out. The result of this haywire approach will be a transfer of debt from the private sector into the public sector.

But in the meantime the banks have subscribed to public bond issues from the Spanish state, destined to finance its debt, using funds lent to them by the ECB to enable them to do so. To make such an operation possible, the Central Bank will lower their requirements regarding the quality of the assets put up as collateral by the banks. Bearing in mind the differential in the rates, it will be a profitable operation for the banks since they will end up lending at higher rates than they borrow at.

What conclusions can be drawn from all this at the end of the day?

1 – The ECB is playing the role of bad bank, which the Spanish government didn’t create, by taking on all the toxic mortgage-related assets.

2 – The bailing-out of the banks is increasing the public debt, which the State was already struggling to reduce.

3 – The rescued banks have been further endangered since they now hold even more of this debt, which may need restructuring in the near future

If the logic behind these measures is jumping out at you and you have found the treasure at the end of the hunt, then you could be the ideal candidate to apply for a post at the Euro Working Group, the organism of bureaucrats who prepare the meetings of the Eurozone financial ministers. If not, maybe you could envisage starting up in the near future on a blog hosting a column about the European debt crisis.


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