With the imminent recapitalisation of Spain's banks, concerns grow that the Eurozone's €100bn bailout may prove insufficient, triggering a greater crisis
The Spanish government has officially asked its eurozone partners for up to €100bn to recapitalise its struggling banking sector. Writing to Jean-Claude Juncker, the Prime Minister of Luxembourg and president of the Eurogroup, the Spanish finance minister Luis de Guindos suggested that the text of a memorandum of understanding would be agreed by the Eurogroup’s next meeting on 9 July.
Olli Rehn, the EU’s Commissioner for Monetary and Economic Affairs, echoed Guindos’ optimistic sentiment:
“I am confident that we can conclude an agreement on the memorandum of understanding in a matter of weeks, so that we can proceed with the restructuring effort.”
While Guindos’ letter didn’t specify a particular amount, the bailout package currently under discussion is worth €100bn, the sum made available by EU finance ministers earlier in the month. “Everyone agrees”, the Guardian notes, “that the IMF estimates of €40bn for Spanish bank recapitalisation look too low.”
Yet there are concerns that this bailout, too, will prove insufficient. Today, a briefing by the influential Eurosceptic thinktank Open Europe considers the likelihood of another dramatic crash in Spanish house prices, concluding that “the country’s banking sector could need an immediate €110bn capital injection to withstand potential losses”. The amount required could, they suggest, increase yet further:
“Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and eurozone economy continues to deteriorate.
Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full Eurozone bailout.
With Spain facing funding costs of €548bn over the next three years, the Eurozone’s bailout funds are not equipped to handle a Spanish rescue.”
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The recapitalisation of Spain’s banks is, we understand, to be channelled through the government’s Fund for Orderly Bank Restructuring, or FROB. As such, the costs involved will add to an already-spiralling quantum of government debt. Yet the circumstances of this bailout, as the Economist’s Vincent Forest has told the Guardian, are peculiar:
“This bail out will come with less strings attached than the ones received by Greece, Portugal and Ireland. The conditions attached to the deal will apply only on the Spanish banking sectors, whereas the other countries had to accept an almost complete takeover of public finances.
Such conditions would have cast even more serious doubts on the Spanish finances…Furthermore, given the strong commitment by M. Rajoy’s government to fiscal discipline, the need for fiscal monitoring was less prevalent.”
This bailout is a huge gamble: with the stakes so high, Europe finds itself between a rock and a hard place. It quite literally cannot afford Spain’s public finances spinning any further out of control, yet neither can it risk unnerving the markets once again by imposing top-down austerity a la Greece.