So Spain is to receive an up to €100 billion rescue package to help prop up its banks. The fact that the obligation to repay the money (which will initially come from the EFSF, the euro-zone’s existing bailout fund) will rest with the Spanish state represents a concession by Spain (beggars can try to be choosers): the country had wanted the cash to go to the banks directly, but for any number of reasons (not least the banks’ questionable credit) the euro-zone leadership said that was a no-no. The money will be channeled into the banks through FROB (the Spanish government entity responsible for restructuring the country’s banks), eventually adding as much as 10 percent to the country’s debt/GDP ratio. On the other hand, while the money is conditional on reforms (what does that really mean?) within the banking sector, Spain will not be subjected to the full humiliation of Greek, Irish and Portuguese-style ‘supervision’. And to be fair, the country is already working its way through a deficit reduction program.
As usual, Open Europe has an excellent summary of what’s being proposed, and what’s right and what’s wrong with it. As Open Europe notes, the Irish are likely to feel somewhat aggrieved (they were not permitted to treat their banking crisis as an essentially separate issue) while the Finns will once again be on the warpath with demands for collateral. Amongst other issues, the Finns are unhappy with the idea that relatively small countries such as theirs should be coming to the rescue of Spain, the world’s thirteenth largest economy.
Estonia, another member of the rescue party, might feel the same way. Think about that: post-Soviet Estonia is on the hook for Spain.
Open Europe concludes on an ominous note:
Questions will also arise over the strength of the eurozone bailout funds – Spain guarantees around 12% of them, surely its guarantees are now worthless or would do more harm than good. Additionally, now that one of the larger countries has asked for support pressure will intensify on Italy (particularly with the falling support for the technocratic government and the slow pace of reform).
On we go….