The formal request was submitted by Spain's economy minister Luis De Guindos to eurogroup chairman Jean-Claude Juncker today. ‘I have the honour to address you in the name of the Government of Spain to make a formal request for financial help for the recapitalisation of Spanish financial institutions that may require it,’ it read. MT reckons it’s an ‘honour’ most ministers would happily forego…
Spain’s domestic banks have been severely damaged by the continuing sovereign debt crisis. During the boom years, huge loans were doled out to construction companies and players in the property market – loans which have since gone bad. So, unlike Italy, which was stymied by government over-spending, Spain's undoing was brought down by its private sector. Two very different ways to get into a financial crisis, but the outcome is still the same.
According to an independent audit last week, Spain’s banks will now need a minimum of €62bn to stabilise themselves, but the final figure is more likely to reach €100bn or more. The details will be worked out before the next eurogroup meeting on July 9.
But the Spanish storm is far from blowing over. Firstly, its difficulties raising money through its sovereign bond auctions have highlighted the depths of its plight. Spain could yet need a full bailout, in the manner of Greece, Ireland and Portugal. And unlike these nations, Spain is Europe fifth largest economy. Saving it will need nothing short of a financial miracle.
And then there’s the small matter of who gets this banking bailout. At the moment, the pot is destined for the state Fund for Orderly Bank Restructuring (Frob), which will then parcel out the funds to the banks in need. But this means that the loan rests squarely on the government’s tab, taking government borrowing levels through the roof and severely damaging its prospects for the foreseeable future. If the money was given directly to the banks, however, it would be their problem – not a national one.
Spain isn’t going to get its hands on the cash without making a few concessions. It will have to make 1001 promises, including a raft of cuts and a deep restructuring of its entire banking sector. This may require the creation of a couple of ‘bad’ banks, zombie institutions carrying the majority of house property assets and the forced liquidation of insolvent businesses. It’s enough to send a shiver down any banker’s spine.
This is the reality of a bailout. It’s a tough love solution, and Spain is in for a long, hard struggle. The hawks at the European Commission, the European Central Bank and the International Monetary Fund will be watching its every move very closely for years to come. Spain’s population will invariably pay for the financial concessions in the form of austerity and hampered growth for years. But the country is fresh out of options: it’s a case of no pain, no gain for Spain.