European banks and the bailout tag

Does anyone know of a borrower with a credit line of which he has only used 40%? The Spanish government has taken €41.3 billion from the €100-billion rescue package offered by the Eurogroup towards Spain’s banking sector restructuring. The availability of the loan expires on December 31. Both Ministers of economic affairs in Madrid have assured again and again that it won’t be necessary to tap the rest of the credit line, but the governor of the Bank of Spain, Luis de Linde, has voiced some doubts about it.

To be fair to the Spanish government, it must be said that nobody has ever announced in advance a petition of a new bailout or the intervention of a bank. This sort of decisions are reported at the moment of execution with the intention of avoiding capital flight events.

In spite of the frequent denials coming from Madrid, though, using that cash–officially it isn’t called a banking rescue but “financial assistance in favourable conditions”–would be a clever thing to do. Why? Well, the clue is in those “favourable conditions,” of course.

It is just easier to use an already set up credit line for with one pays an interest rate of 0.5%, of which we also already know the conditions–the memorandum of understanding rules–and which does not add a penny to the public deficit pile and so does not derail current efforts to reach the deficit target imposed by the European Commission.

On the other hand, being on the receiving end of a rescue cash line means Spain will become a member of the Greece-like bunch of Eurozone troubled countries next to Greece, Portugal and Ireland. Logically, if Madrid taps those €6o billion, the markets will infer that Spain needs them, and if it does, even partially, the cause will be that the national banking system’s health has some problems and the Guindos decrees and the Oliver Wyman audits helped very little–nevertheless, the reality is that the Spanish banks are well provisioned, yet new capital gaps could resurface in the next months.

The stigma attached to the rescued tag, in any case, could be moderated if Brussels expands the loan’s deadline beyond December 31. Then, the European Central Bank will publish its exhaustive evaluation of the European banking industry, before becoming its single supervisor and carries out further stress tests. Some European banks with difficulties to pass them will be Spanish, but there will be Irish, Portuguese and German entities, too.

What is clear is that the markets doubt again that the European banking system has overcome its vulnerabilities.