After weeks of asking for financial help without making it sound like a bailout request, the fourth largest euro zone economy has finally bitten the bullet and formally sought external help to bail out its troubled banking system.
In a news conference last Saturday, Spain’s Economy Minister Luis de Guindos declared the government’s intention to ask for European financing to help its banking sector. If you recall, Spain’s banks have been losing an uphill battle against higher capital requirements and a collapse in the housing market.
What we know so far
Details of the formal request are yet to be announced, but word in the hood is that the euro zone officials can grant as much as 100 billion EUR worth of bailout money. De Guindos insists that it’s more than enough to cover the capital needs of the Spanish banking sector.
Spain has hired two independent firms, Oliver Wynman Ltd. and Roland Berger Strategy Consultants, to audit the banking sector. When their reports are released in June 21, Spain is expected to file a detailed request to the European Commission, who will then coordinate with the ECB, European Banking Authority, and the IMF for the bailout’s conditions.
Officials have yet to decide on whether the money will come from the EFSF or the European Stability Mechanism (ESM). What we do know is that Fondo de Restructuracion Ordenada Bancari (FROB), Spain’s bank recapitalization fund, will receive the bailout money and will be responsible for distributing the funds to banks that need them.
How is the “bailout lite” different from a full-scale bailout?
If there’s one thing that’s consistent about De Guindo’s actions for the past few weeks, it’s his aversion to the stigma of a euro zone bailout. Heck, he insisted that Spain is asking for “financial assistance” and not a “rescue!”
He also emphasized that since the “bailout lite” package will only be used on Spanish banks, the bailout’s conditions will only apply to the banking sector and not the entire economy. This is probably a good thing since Spain is already facing harsh austerity measures to meet its deficit targets.
Based on EUR/USD‘s reaction to the “bailout lite” rumors late last Friday, investors are in favor of the program. Apparently, many believe that it’s preferable to a full-scale bailout program that Spain would inevitably need if it doesn’t do anything for its ailing banks.
Does this mean that Spain is now safe from a full-scale bailout?
Heck no! Spain isn’t out of the woods just yet.
For one thing, the Spanish government will still have to fight for access to markets. Spain’s Treasury has already reduced its debt issuance this year due to weak foreign demand while the local banks and the ECB remain the top buyers of Spanish debt.
But with the ECB on a wait-and-see mode and the local banks about to be more dependent on euro zone funds, the Spanish government might have a harder time enticing investors.
It also doesn’t help that Spain credit rating has taken more hits and that its 10-year bond yield is still uncomfortably near the 7% mark that usually signals a full-scale bailout.
As if not having access to markets isn’t enough, Spain also has to deal with a ginormous public debt. The bailout lite program is estimated to add another 8% of Spain’s GDP worth of debt since the package will be paid the Spanish government.
Unfortunately, the government is already implementing harsh austerity measures as it tries to contain its public debt from 8.9% of GDP last year to only 5.3% this year. In addition to that, the Spanish economy is in a recession with a high unemployment rate and a troubled housing market. Looks like the odds aren’t exactly in the Spanish economy’s favor, eh?
Odds aren’t everything though. Just look at Timothy Bradley’s recent win over Manny Pacquiao! Maybe Spain will indeed have a better chance at surviving a Grexit now that the country’s banking sector has been granted a breather. Heck, maybe it can even avoid a full-scale bailout! Or maybe we’re all just kicking the can down the road. What do you think?