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Bluster and denial over Spain’s bail-out – MoneyWeek

Thegovernment’sattitudeis“emblematicofSpain’sapproachtoitsbankingcrisis,characterisedbyamixtureofblusteranddenial”,saysTheEconomist。

Europe’srescuefundsaren’tallowedtoinjectmoneydirectlyintobankssothemoneyisgoingtotheSpanishgovernment。

Themoneyisaloanthat–iftheentiresumisborrowed–wouldaddaround10%toSpain’soveralldebtburden。

“SpainisbeingforcedtoborrowfromEuropetobailoutitsbanksbecausemarketswon’tprovidethemoneydirectlytoSpain,”saysWarner。

Ineffect,it’sarescuethatdifferslittlefromEurope’sbail-outsofIreland,PortugalandGreece。

Is€100bnenough?

OnereasonthemarketsarescepticalisthatSpainhasalreadyhadtoadmitthatitsbankswereinbiggertroublethaneveryonehadthought,astheunexpectedlylargerescueofBankiaafewweeksagohighlighted。

Sothere’severychancethat“thecapitalrequirementsofSpanishbanksmayturnouttobemuchhigher”than€100bn,saysSatyajitDasinTheIndependent。

Banklosseswillsteadilymountastheeconomyandthehousingbubbledeflatefurther。

Housepriceshaveslidby15%-20%,butareforecasttofallbyupto50%-60%inall。

Bankscouldendupneedingover€200bn,saysDas。

NorwillthisdealallayfearsthatSpainwillneedageneralgovernmentbail-outtoo。

Giventheoverridingfearthatthebankswillbankruptthegovernment,thenifthefinancialsectorneedsevenmorecapital,bondyields–andhencethecostofborrowing–willrisefurtherfromalreadyunsustainablelevels。

Inanycase,asthisdealaddstothenationaldebt,“potentialbondbuyersarelendingtoaneven-moreindebtedcountry”,saysCharlesForelleinTheWallStreetJournal。

Moreover,thebasicworryamongbondholders–thatharshausterityissimplymakingthedebtproblemworsebyshrinkingtheeconomy–willendureasthesecondrecessioninthreeyearsworsens。

“Thebankbail-outisunlikelytoreversethedownwardmomentum,evenifiteasesthecountry’screditcrunch,”saysTheEconomist。

Moretroubletocome

Anotherpotentialproblem–thisdetailhasyettobeconfirmed–isthatthedealseemslikelytoinvolveprivatebondholdersbeingsubordinatedtoofficialonesintheeventofaSpanishinsolvency。

AsinthecaseoftheGreekbail-out,thiswouldmeantheeurozonebeingpaidbeforeprivatecreditors。

Butthiswillmakeprivatecreditorsallthemorereluctanttofundthecountry,aswesawwithGreece。

Anotherpossiblecomplicationisthattheconditionsattachedtothedealappeartobelessonerousthanthoseattachedtootherbail-outsforthelikesofGreeceandPortugal。

Sotheotherperipheralstatescouldinsistonrenegotiatingtheirrescuepackages,whiletheanti-austerityvoteinSunday’sGreekelectionmayreceiveaboost。

Thisdeal“fitsinthefire-fightingcategoryofmeasures”,saysFxpro。

com。

WiththeGreekelectionloomingandfearsoverItaly’ssolvencygrowing,it’snowondermarketsremainasjitteryasever。

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