From the Financial Times:
After months of denials by Spanish leaders that the country needed a bailout, it fell to Luis de Guindos, the economy minister, to declare in Madrid on Saturday that “the government of Spain declares its intention to request European financing” for its banking system.
The formal request by Spain to the EU is expected before June 21, when Eurozone finance ministers meet in Luxembourg and after a detailed report is issued by two government-appointed advisers on the banks’ capital needs.
The amount? Up to 100 billion euros ($125 billion). From a statement issued by Jean-Claude Juncker, Luxembourg’s Prime Minister and head of the Eurogroup of finance ministers:
“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total.”
The bailout will come either from the Eurozone’s temporary bailout fund (the European Financial Stability Facility) or, as soon as it is operational in July, the permanent rescue vehicle (the European Stability Mechanism).
According to the FT, the bailout funds will be channeled through the Spanish government’s Fund for Ordinary Bank Restructuruing (FROB), which will then inject the funds into the banks, shoring-up their capital positions.
Here’s the critical point (again from the FT):
“Because FROB is part of the Spanish government, bailout loans would still be on Madrid’s sovereign books and the government would bear ultimate responsibility for repayment.”
This means that the bailout will cause the Spanish government’s debt-to-GDP ratio to increase. If recent history is a guide, the increase in this ratio will result in higher interest rates on future Spanish government bond offerings. In my view, then, the bailout is nothing more than a band-aid that will stop the current bleeding but worsen the infection.
Market participants will be well aware that agreement on this bailout mechanism means that the Spanish government failed to secure a deal in which the bailout funds would directly inject capital into Spanish banks, thereby avoiding an addition to government’s debt.
According to the Wall Street Journal , de Guindos said
“The Spanish government is determined to do its best to protect the stability of the euro” and added that the conditions attached to the loans “will be imposed to banks, not to Spanish society, nor to its fiscal or economic policy.”
This strikes me as wishful thinking, at best, or delusional, at worst.