The bailout and Spain: a guide, so far


A South-African friend of Spain (and of mine) seems uncapable of keeping track of the massive flows of information and misinformation available to her through the media. What’s with the so-called Spanish rescue–she is asking–and what’s all the fuss about?

The Corner would like to have a try at providing some, at least, of the answers.

A European fund was set up back in 2010.

the European Financial Stability Facility. Given certain circumstances, member countries in difficulties may request financial support from the EFSF and engage in negotiations with the European Commission. The EFSF will negotiate a loan only after European institutions have given the go-ahead. It is not a bank and has no capital. Whenever it is called upon to extend a loan, the EFSF will issue bonds in the market and make the relevant amount available to the petitioning country. Each issue will be guaranteed pro-rata by each euro zone country. The EFSF is not allowed to operate beyond €440 billion.

So far, EFSF has been involved in financial assistance for Greece, Ireland and Portugal. Current commitments total up to roughly €188 billion.

Spain came on the stage last July.

Memorandum of Understanding with the European institutions paved the way to a master agreement with the EFSF whereby the Spanish government secures up to €100 billion to recapitalize its banking system. EFSF is therefore left with a remnant of €152.000 m.

Another institution, this time more like a bank, created in 2011, seems now ready for action. The European Stability Mechanism would have a lending capacity of up to €500 billion. So, here we stand now. There is a lot of money around that is available for any additional funding to those three countries, or for a fresh rescue package in case Spain or Italy would want, or need to, submit a request.

Is it in the Spanish interest to submit the appropriate request for financial assistance?

Politics pervades now the situation.

Early in August, the European Central Bank laid down the rules of a new game. After concluding a MofU with the European institutions, member countries entering into a masteragreement with the EFSF or ESM, can expect the ECB to purchase unlimited amounts of their external debt on the secondary market, thus keeping under control the volatility of risk premia.

Now, the MofU can be expected to set tough conditions to petitioning countries.

Given however the ongoing austerity and the earnestness shown by the Spanish government in cutting back budget deficits, the authorities would start from a strong negotiating position and could make the most of it in opposing additional conditionality.

In the quid-pro-quo–you submit to conditionality, the ECB will tame those wild risk premia–the Spanish government would get hold of a substantial amount to deal with its equally substantial 2013 debt commitments. Replacing former debt, or taking on fresh debt, long term, and at below-the-market rates looks like an interesting business proposition. There are obviously real gains to be made here.

Governments like having sensible policy options rather than being pulled down along pre-determined courses. Access to European funding would give the Spanish government an option: whether drawing down chunks of the loan as appropriate, or keeping directly in touch with those touchy markets by issuing bonds at reasonable premia over the German Bund.

Of course, policy-makers, here and elsewhere, are elected to have their own views of what is best, and those views may well differ from the simplistic number-crunching done here. The way suggested above will look a poor second- or third-best if politicians or media insist in attaching humiliating connotations to the word “rescue”, for example. And to make matters worse, setting in motion ECB’s proposals, that many German experts downgrade as desperate pump-priming, is bound to ruffle many feathers in the country where stability is a dogma.

Admittedly, there is more to it.  Hasty simplifications cannot tell the whole story. Still, cramming it all into this crisis-101 might be of some use to our friend in South Africa.


About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.