Spanish Bailout: The Wider Implications


Spain is deciding this afternoon


Spain has asked for an assistance of 100 billion EUR for their banking sector. The credit is formally going to be extended by the rescue fund EFSF and its successor EMS. What is avoided is assistance of the IMF with its associated savings and reform program. The interest rate will be 3%

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A formal application will have to be laid before the European Commission with the European Central Bank, the institutions of the European Bank Inspection and the IMF to check if the conditions for aid from the EFSF are fulfilled.

Spain will have to guarantee the amount.

The conditions seem to be:

The restructuring of the banks and they will have to be reformed and cut down.


The IMF had estimated a minimum need of 40 billion EUR, more likely 60-80 billion. A figure the ECB apparently does not entirely trust. The problem is that Spain does not have access to borrow the money for this restructuring.

The economic reforms are apparently seen as a totally different matter, a matter that is more or less already in hand through the Finance Compact.

What remains unclear is: What is the position of the “shareholders” in the banks? The mere amount seems to indicate that the banks are without equity, thus the shareholders need not be considered.

Another thing is that the apparent clean bill of health for Santander and the other “systematic” banks is clearly not trusted – or rather provisions are taken to insure they can’t cause any trouble.

We are talking a de facto nationalization of the Spanish banking sector. No doubt about it, there has been a bank run of a 100 bio. EUR in the beginning of this year; but it is not the liquidity issue that seals the fate of the Spanish banks: It is the application of asset appreciation principles applied, that leaves the banks irredeemably insolvent. The application of the Basel III recommendation as to solidity of banks will be the standard banks will be judged against.

This has wider applications: The intentions of the banks to “raise capital” on the markets will probably receive little credulity – especially as the bank inspections peruses the books closer: One point of very poignant critique against the Spaniards. It makes it unlikely that other banking sectors will be treated more leniently.

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