Last Sunday’s announcement of a potential 100 billion Euro emergency loan for Spain’s ailing banking industry followed a pattern that has become grimly familiar over the past two years of the Euro crisis. An announcement made with much fanfare, the global stock markets rebounding on a rare piece of good news, then the grim realisation that the headline announcement amounts to far less than people initially thought it did. This article will look at some of the most important questions raised by this latest act in the tragicomedy that has become the fate of the single currency.
Olli Rehn, the EU’s Economics Commissioner
(c) Greek Prime Minister’s Office
Question 1: what does this do to Spain’s debt profile?
The term “debt profile” is jargon for understanding not only how much debt a country carries but also the order in which that debt is to be repaid. Sunday’s announcement was cryptic to the point of saying nothing about how this 100 billion Euros affects Spain’s debt profile in terms of who the money would be paid back to, what priority this 100 billion would have in Spain’s overall debt profile and, finally and perhaps most crucially, if this 100 billion was placed high in Spain’s debt profile – in other words, if it was given the highest priority in terms of repayment – how would that affect the holders of other Spanish debt? This uncertainty is one of the key reasons why Spain’s borrowing costs have, as of Thursday morning, hit yet another record high for the Euro era.
Question 2: when is 100 billion Euros not 100 billion Euros?
Sunday’s announcement, made by European Union (EU) finance ministers, mentioned the figure of 100 billion Euros as the size of the loan being given to Spanish banks but, at the same time, it also stressed that the exact size, nature and terms of the loan would be dependent on the outcome of an independent audit of the entire Spanish banking system, due to be published within the next few weeks. This inconsistency leads to several sub-questions.
Sub-question one: if the European Union was waiting on this independent audit, where did the figure of 100 billion come from?
Sub-question two: if the independent auditors find that the Spanish banking system requires significantly more than 100 billion Euros to stabilise it, would the member states of the Eurozone find additional cash or would 100 billion represent the outer limits of what their fellow Eurozone members are prepared to lend Spain?
Sub-question three: if the independent auditors are unable to determine an exact figure (a distinct possibility given the extremely complex nature of the various financial arrangements that Spanish banks during the boom entered into with one another), and then given that many of the property-based assets held by Spanish banks are currently next to impossible to accurately value given the collapse of the Spanish property market, how would Eurozone finance ministers choose to proceed if the auditors essentially say that, in order to stabilise the Spanish banking system, a blank cheque is required?
Question 3: what about Ireland and Greece?
The major novelty of Sunday’s announcement was the Spanish government’s apparent success in avoiding the kind of conditions attached to Eurozone financial systems that Greece, Ireland and Portugal have had to implement in return for bailout cash. The argument of the Spanish government was two-fold: first, it has already undertaken wide-ranging efforts to reform its financial system and to reduce its deficit, so further EU conditions are unnecessary; and second, because the cash was being channelled directly to banks, it was unnecessary to impose conditions on the Spanish government. It seems that, for the time being at least, Eurozone finance ministers, in order to stave off another crisis, accepted this reasoning. However, looked at in the cold light of day, the Spanish government’s arguments about why this bailout is different from the previous ones have so many holes in them they could be marketed as a new brand of Swiss cheese.
As the Irish government has already pointed out, all of its bailout money has gone into supporting the Irish banking system – and the Republic of Ireland would not have required a bailout had its banking system not collapsed. The only difference between Ireland and Spain is that, in the case of Spain, the money is going directly to banks and, in the case of Ireland, the money went to the Irish government which then lent it to banks.
Also, the Spanish government’s argument that it is doing everything it needs to do so further conditions are unnecessary was exactly the same argument that the Greeks and the Portuguese both tried to use ahead of their bailouts and, in both cases, their fellow Eurozone members virtually laughed them out the room. The Spanish bailout may very well make it hypocritical for any Greek or Portuguese politician to stick to Eurozone-imposed austerity when it could be argued that the Spanish are getting a bailout on comparatively very soft terms.
In reality, the difference between Spain and other Eurozone countries in receipt of a bailout is simple: Spain is a much larger economy than Ireland, Portugal and Greece put together and therefore Spain has more leverage. If we have reached a situation where there is one rule for smaller economies in the Eurozone and another for larger economies, what does this mean for the solidarity of the Eurozone?
What the future holds for Spain and its troubled banks nobody can know. What we do know for certain is that we are nowhere near the end of the story for the Euro.