Madrid must drop all pretence as its moment of need has arrived
ANALYSIS:Spain looks set to get a limited package of aid, with money ringfenced for banks, not the state
SPAIN’S STRUGGLE to avoid a humiliating international bailout appears to be at an end. The remaining questions centre on the scale of a rescue package for the country’s stricken banks, its precise form and the sequencing of the intervention.
The drama is moving rapidly. Four days ago, the government conceded for the first time that it would need external aid to prop up the banks. Spain had been expected to wait until the week after next before deciding its next move. At that point, the result of an stress test on the banks would be known.
However, word emerged early yesterday that euro zone officials had been instructed to prepare a teleconference for finance ministers today. Although the arrangements were still not finalised last night, the expectation in European circles was that prime minister Mariano Rajoy would make a statement setting an aid application in train either this morning or after the closure of US stock markets last night.
Two inexorable forces are at work. The first is the steadily deteriorating condition of the country’s battered financial system, which suffered a €96 billion capital flight in the first three months of the year. Dire warnings from Spanish ministers point to growing alarm at the information emerging from the stress-test process. In a sense, the examination merely delayed the inevitable but gave the government and Europe some breathing room.
The second factor is the volatile external situation. The big concern here is the second Greek election, an unpredictable affair with potential to spin out of all control. Anti-bailout parties could well prevail tomorrow week, setting Athens on a dangerous course back to the drachma. This could create chaos in the euro zone, with Spain first in the line of fire. It would seem safer by far to offer certainty as to how the rescue of its banks is going to be funded.
Mr Rajoy and his ministers insisted all along that they had no requirement for any external help. In the eyes of many official observers, however, this was increasingly unsustainable. Top Europeans were already warning in March that Spain would need aid.
So the country has been on the rack for months, trying all the time to convince its many doubters that it has the financial fire-power to recapitalise the banks on its own. No one believed it. In recent times the only market for Spanish sovereign debt was among the very banks that must now be propped up by Europe.
The looming rescue of Spain has a similar origin to Ireland’s, the two having their roots in a brutal property crash that felled the banks and then the State.
The European response will be a little different, however. Ireland received a full EU-International Monetary Fund bailout, with money for banks and money to keep the wheels of State turning.
The expectation now is that Spain will receive a slimmed-down aid package, with money ringfenced for its banks, while the government tries to stay in regular debt markets for its day-to-day financial requirements.
A core objective is to isolate the banks, giving the Spanish state a fresh chance to regain the confidence of private investors. Another is to minimise Spain’s drawdown of aid from the bailout pot. The fear all along was that the money required for Spain to be taken out of private markets fully would simply overwhelm the rescue fund. Europe hopes to avoid that fate with a package tailor-made for the banks.
Still, Spain’s clamour for the money to go directly to the banks from the permanent ESM fund looks like it will not be successful. The basic idea was that the money would not be added to the Spanish national debt, thereby improving the country’s prospects of staying in private debt markets.
France and Italy were supportive – and an expectant Ireland looked on hopefully from the wings. Germany baulked, however, arguing that this was nothing more than a eurobond by another name.
A further factor here was that any special concession to Spain would be perceived as a sign of laxity at a time when EU leaders are trying to persuade weary Greek voters that there will be no straying from the preordained bailout path.
This might not be the end of the matter, however. Amid uncertainty over the fate of Greece, the concern remains that Europe still needs a bigger, better response to finally overcome the crisis.
If Germany yields down the line on the powers of the ESM, then a door might open for Ireland.
We’re not there yet, however.