Why Is The EU’s Spanish Bailout Beginning to Unravel?

15 january 2013

Steve Schaefer reports here on Forbes that stocks have given up their early gains following an apparent EU bailout of Spain, this past weekend. Here are a few words on why. This looks more and more like a deal done to appease the markets prior to the Greek elections on Sunday. It’s not even clear that there is a deal, but it is clear the EU is far from addressing the problems of its economy.

Yesterday, as the Spanish Prime Minister made a TV appearance to explain the bailout, he and his economics Minister seemed to have different views on the terms and on its effect, one saying it would not add to the Spanish deficit, the other coming clean.

From that point of on, we have had more clarity from other Ministers involved in the negotiations, putting their points of view. The omens for this deal started to look worse and worse.

The first to clarify was the Dutch Finance Minister. As I said a few days back a deal like this needs some kind of referendum or vote, somewhere – it changes the terms of state financing. The Dutch will have a parliamentary vote and, they say, if that goes against the deal they will not participate in it.

Why is that important? The deal is supposed to be an act of unity between 17 Euro-zone members. The strength of backing for Spain matters. The Dutch are one of the few countries that are solvent enough to get behind the deal. For those who are not aware of it, the Euro zone’s 17 members includes countries like Cyprus – themselves on the point of seeking a bailout. And Malta. Countries with negligible resources. If the Dutch are out, then go figure. Finland can get behind it and of course so can Germany – but Malta?

Why would the Dutch participate? Big exposure from it own banks in the Spanish property market, probably through the Spanish banking system. That’s the main reason. Why might they not? You have to draw the line somewhere.

This morning the Irish negotiator Junior Finance Minister Brian Hayes,  said Spain’s terms were no better than any other countries’. And he added that the money would come from the European Stability Mechanism (ESM) which has yet to be formally set up – pushing any deal weeks into the future.

In addition the ESM will subordinate all other debt – so in the next few weeks, it is likely that Spanish borrowing will get tougher not easier, and antagonize the markets.

Simultaneously, EU officials were briefing Reuters that the money would come from the European Financial Stability Facility. Just as Spain’s leaders did not know the terms, it seems key negotiators don’t, either, adding to the sense of farce. So far today views have been offered that suggest either mechanism might be used, implying no agreement was reached. But you get the picture. This is no done deal.

Next Fitch downgraded the two leading Spanish bans to BBB+. The problem in the Spanish banking system was supposedly confined to the Casa – or savings banks. Banco Santander and BBVA are global mainstream banks, in the case of Santander, with significant branch networks in countries like the UK. This starts to looks like everyone’s problem.

The problem from an EU perspective is manifold. People increasingly see the EU as the problem, and the anger is welling up on sites like Twitter. Yet the EU now sees the market as the problem and is trying to manage that instead of dealing with what really matters. It continually fails to address fundamental problems in the economy.