Pending business in the bailout
The markets demand details of the rescue plan and ECB backing for Spain’s public debt
On Monday the initial satisfaction at Saturday’s bank bailout, an operation necessary to recover the credibility of the Spanish financial system, underwent two important corrections. Firstly, German and EU authorities pointed out that the aid package to Spain, to be channeled through the Orderly Bank Restructuring Fund (FROB), implies strict vigilance by the “troika” over the Spanish deficit. While the bailout operation is very positive for Spain, it is not unconditional: it brings with it close scrutiny of economic policy, given that the Spanish debt will now be boosted by 100 billion euros.
It was not credible that so great a capital input would come without strings; nor must the government now persist in pushing its rose-tinted version according to which the bailout is a mere loan at low interest. The sooner it abandons denial and accepts the inevitable loss of autonomy after a bailout, the better.
The second bucket of cold water came from the markets. The risk premium shot up again above 520 points. There are reasons for this behavior. Doubts linger over Greece which, after the present bailout, has become the euro zone’s gravest problem. Greece’s possible exit from the euro would cause a heavy impact on the European financial system and on countries such as Spain.
But the most telling reason has to do with the ECB. The bailout restores confidence in a joint, coordinated policy in the euro area, but the ECB needs to make it clear that it will react forcefully to any sharp rise in Spain’s risk premium. This is its job, since no one else can do it. Otherwise the cost of financing the debt will turn the 100 billion euros into an added burden to Spanish solvency.
So far the exact terms of the bailout are unknown, except that the FROB, for which the Spanish state is responsible, will have up to 100 billion euros to recapitalize damaged banks. But the markets are driven by details. There must be prompt information on the due date of the loan, the rate of interest and the order it occupies in case of default. It is a mistake to make a decision and delay its application. The government must be aware that investors and citizens expect a clear outline — and soon — of how the EU package is to be distributed among the banks that need it. Effective recapitalization should not be deferred by reason of an erroneous or excessively foot-dragging method. The sooner the banks receive the capital, the sooner the process of credit recovery will begin.
In short, there is a great deal of pending business. One fundamental lesson: the EU has to set up a banking union. The solvency of substantial countries such as Spain cannot be left at the mercy of market stresses, resulting from national weaknesses that could well be kept in line by a joint policy. Europe needs a single Treasury, more fiscal homogeneity, an overall mechanism for action against bank crises, similar to a direct injection of capital from EU funds to the banks, and a single bank supervisory agency. In this way, future banking crises would be less traumatic than they now are.