In Focus: Spanish bank bailout is no instant fix
Spain’s bank sector bailout is a short-term approach to a long-term structural problem, and not a panacea.
The 100 billion euro bailout of Spain’s troubled banking sector, agreed to in a weekend conference call, may be more than double the size of the amount the International Monetary Fund calculated the country’s banks needed to stay afloat. But while the danger of a near-term run on Spain’s banks has been reduced dramatically, the bailout is no panacea, and likely won’t be enough to stop the ripple effects of the European debt crisis from continuing to spread.
Certainly, past bailouts have done little to stem the difficulties of the countries they were designed to aid. Only in Ireland have government bond rates declined relative to the German 10-year bund in the wake of a bailout, as the chart below shows. Greece’s post-bailout woes are now achieving near-legendary status, while the spread between Portugal’s government funding rate and that of Germany has widened significantly over the last year. Bailouts may have provided some short-term relief for the beleaguered euro, but the common currency now trades at levels not seen since just after the initial Greek bailout of late 2010. Eurozone equities, as measured by the Euro Stoxx equity index, are hovering near their post-financial crisis lows.
True, the Spanish bailout is free of onerous terms and conditions of the kind that may cause Greek voters to reject the austerity element of their own bailout package as too oppressive – and that ultimately may lead to “Grexit”, aka that country’s departure from the eurozone. And it’s a bank-targeted bailout, so although structured as a “bailout” – with the money going directly to a Spanish government bailout fund, rather than to the banks themselves – the hope is that the market won’t see this as a sign that the government itself isn’t creditworthy enough to maintain its access to global financial markets at affordable rates.
But the bailout is no panacea – even for the banks themselves. As the chart below illustrates, past bailouts have failed to do more than halt temporarily the steady erosion in the market value of European banks, as reflected in the Euro Stoxx bank equity index. There’s no indication that this latest emergency effort will be any different. And there remains the risk that this could be the first in a series of even larger bailouts required to help keep Madrid’s government finances from dragging the country under; adding 100 billion euros to the country’s national debt isn’t as automatically worrying as it would be in the case of Italy, for instance, given that Spain’s government debt load is less perilously large than that of many other eurozone members. But the country is still heavily reliant on external financing – and investors are proving increasingly reluctant to buy Spanish government securities except at yields north of 6%.
As this analysis from our colleagues at Reuters Breakingviews shows, the risk of Spain being shut out of global financial markets and then being forced by market events to turn to its eurozone partners for a full bailout, has not evaporated. And it isn’t clear that such a massive action would be manageable, given the sheer size of Spain’s economy, particularly if Italy becomes the next domino in the chain to teeter on the verge of collapse.
That uncertainty is the reason any relief rally in response to the apparent solution to Spain’s banking crisis on Monday had largely lost ground by mid-morning in New York. While Asian stock markets began the day with strong gains of around 2% in major indexes, late in the trading day in Europe, Britain’s FTSE 100 was only 0.2% higher, and as of this writing, major US indexes were flat to slightly lower. Yields on Spain’s bellwether 10-year government bonds dipped briefly to just a few basis points above 6% — but then climbed back to close to their previous levels. Another ominous signal is that the FTSE MIB – an indicator of the Italian stock market – was down 2%, a possible sign that market vigilantes are turning their guns on Italy and its precarious economy.
Given the uncertainty surrounding the bailout’s logistics – where will the funding come from? How much will it dilute the holdings of current bank shareholders? – that isn’t surprising. Short-term solutions – especially those that, as the Breakingviews analysis makes clear, are seen as coming late in the day – are unlikely to be welcomed with anything more than a short-term emotional response. When it comes to the eurozone’s future, the jury is still out.
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