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The Spanish 100 billion euro patch: will it work?

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J. Luis Martín.- 06/11/2012

While the dust from the latest European bailout announcement is yet to settle and as markets eagerly embark on a (presumably) longer ‘rally on the headlines-fade on the details’ journey, some may be tempted to believe that, alas, Europe’s troubles are finally coming to an end.

If anything, however, the series of events we have witnessed in Spain over the past four weeks merely represent an abbreviated version of the last four years of EU leaders weaving patches to extend the life of an increasingly torn euro zone.

Only four weeks ago, when the Spanish government nationalized BFA-Bankia (BKIA), Spain’s Finance Minister Luis de Guindos underlined that €15bn of public money would suffice to effectively recapitalize the country’s entire financial system. At the time, De Guindos also confirmed that, in an effort to add transparency and restore confidence in the country’s banking system (de facto overruling the Bank of Spain), foreign independent consultants would conduct audits on all of Spain’s banks.

In the following days, however, as the minister’s figures began to be questioned and upwardly revised by tens of billions (particularly in the case of Bankia), Prime Minister Mariano Rajoy stepped out to send a message of tranquility. At a Popular Party press conference, Rajoy solemnly stated that there would be no rescue of Spanish banks.

Regardless, market pressure mounted to the point of Budget Minister Cristóbal Montoro publicly recognizing that, while he did not expect the “men in black” to visit Spain (in reference to the troika), the country’s doors to financial markets were shutting. All in all, another horrific worsening of the euro zone crisis prompted an unscheduled Eurogroup conference call, as well as the earlier-than-expected release of the International Monetary Fund’s report on Spain’s Fiscal Stability Assessment.

Europe's "no-strings-attached" loan to Spain

Last Saturday, as it has happened in previous eleventh-hour summits, conferences and “new plan” announcements, the Eurogroup issued a vague statement confirming the largest European financial bailout to date: Europe is to lend up to €100bn to Spain (roughly 10 percent of the country’s gross domestic product) so it may address its financial sector’s ever-expanding black holes.

The plan currently stands as follows: either the EFSF or the ESM (not yet launched and pending approval in various countries, including Germany) will extend the loan to Spain’s Fund for Orderly Bank Restructuring (Fondo de reestructuración ordenada bancaria or FROB). The money is to be disbursed in tranches under IMF oversight.

In principle, this is a “no-strings-attached” loan, meaning that Spain will not be required to carry out any specific austerity measures or reforms in order to receive the funds – something that Ireland and other European bailout recipients (and donors) may want to discuss further.

Ultimately, the money will be injected into Spain’s troubled banks at the FROB’s sole discretion – quite an astonishing leap of faith in the FROB, by the way, since Spain’s public prosecutor has opened a probe to investigate the merger of the seven savings banks that formed Bankia.

Not a rescue, according to Rajoy

Yesterday, in the midst of accusations that he lacks courage to face the public at crucial times, Rajoy summoned the media to explain the agreement reached during the Eurogroup’s conference call.

In a matter-of-fact tone reminiscent of the type of Spanish “fatal arrogance” denounced at the G7 meeting two weeks ago, Rajoy proudly stated that it was he who actually pressured the EU to grant Spain an “unconditional” loan, and that such a loan would not impact the national budget deficit.

The prime minister was careful not to mention the words “rescue” and “bailout,” as he went on to infer that securing “a credit line” from Europe was actually part of his plan to restructure Spain’s financial system. The “credit line,” he added, should be understood as unequivocal proof of both, Europe’s unity and the irreversible nature of the common currency.

Rajoy then proceeded to fly to Poland to attend the Spain-Italy European championship football match.

Soon after Rajoy ended his press conference, Socialist Party leader Alfredo Pérez Rubalcaba asserted, “the government wants us to believe that we've won the lottery.”

Weaving one more patch

This loan has absolutely nothing to do with the “fiscal union” most Europeists define as the long-due step required to save the euro. This loan is simply another patch. Should it serve its purpose, and given the impossibility to rescue Europe’s fourth largest economy, it may even turn out to be a cheap patch too.

Germany certainly understands the gravity of a situation that, if “left unattended” much longer, could have further endangered the euro – particularly with the upcoming Greek elections as a backdrop. It is under such a scenario that Germany has opted to facilitate a loan under apparently favorable terms to Spain.

Essentially, Spain will load up to €100bn of public debt – likely to be ‘senior’ in relation to other debt if the ESM ends up being the lender – to placate the markets, to move past a banking disaster of global reach, and, last but not least, to avert a political crisis a stronger intervention from Brussels would have ignited.

As for the “no strings attached” narrative enveloping the loan, a careful examination of the Eurogroup’s statement – as well as Rajoy’s reiterated comments that “more reforms” are coming – should dissipate any doubts that this loan is everything but “unconditional.” Indeed, the Eurogroup statement is vague, except when it comes to pointing Spain’s commitment to meet its obligations to Europe.

Germany continues to demonstrate that it will only move toward the treaty-changing and sovereignty-surrendering safe haven the periphery and others desire if and when political and economic stability in the euro zone meets its criteria. It will continue to try to avoid the EMU’s disintegration, but nobody should expect for Germany to ‘go all in’ to prevent it.

Note: Yanis Varoufakis presents an interesting view, as he argues that Germany will simply not surrender its upper-hand in Europe through further integration.

J. Luis Martín is director of trumanfactor.com

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