Spain – Loan or Bail-out? That is the question!
In the article “Regional autonomy or central control - the Spanish conundrum” published on these pages in April, it was pointed out that the quasi-autonomous regions in Spain were considered out of control by the central government in Madrid. As such the Spanish Parliament had passed a “budgetary stability” law to allow the central government to intervene in the affairs of those regions that continue to miss their budget targets.
One of the measures Spain has taken is to establish the FROB1 – the Fund for Orderly Bank Restructuring – in large part to provide assistance to the cajas – the Spanish regional banks - that have got themselves into serious financial difficulties. These difficulties have in large part come about due to the incestuous nature of Spain’s political, industrial and financial relations in its regions.
Regional politicians have found themselves influenced by property developers to grant development status to areas of land in the regions. The property developers required their projects to be financed. The regional banks happened to have regional politicians on their boards – and as such – finance was lent from these banks to the property developers. But the property bubble spectacularly burst! As such, the cajas now find themselves seriously financially embarrassed – and in danger of going bust. It is in large part this fear of a banking collapse that has driven investors to take money out of the Spanish banking system, thereby increasingly straightening the financial position of all Spanish banks. It has been reported that Spain’s financial sector has in the region of €180 billion of toxic real estate assets.
Over recent days the news has been full of speculation about Spain’s financial position. Some suggested Spain would need bail-out money as its ability to raise money on the international markets became increasingly expensive with bond yields nearing the “unaffordable” 7% mark. However, as late as May 28, Spain’s prime minister Rajoy insisted that "there will be no rescue of the Spanish banking sector."
Spain has been working hard not to accept bail-out money from the Troika (the IMF, the ECB and the EC) – with all the associated austerity measures that would have been imposed – as indeed have been imposed in the bail-out terms that have had to be accepted by Ireland, Portugal and Greece. Instead Spain has negotiated for a considerable sum of money2 to be made available from the European Stability Mechanism to the FROB, rather than to the Spanish Government itself. As such, the Spanish Government is able to argue that it does not need bail-out money; rather it is just the FROB that needs a loan!
Some argue that this is a successful negotiation and that the Spanish Government will still be able to raise money on the international money markets at a competitive rate. However, others point out that ESM loans – by definition – take precedence over any other loan. Consequently, the Spanish Government would have to ensure that any money that it has would be used to manage the FROB debt – and only secondary consideration could be given to Spanish bond holders. As such, Spain may find new potential bond holders harder to find. If so, this manoeuvre could still backfire on Spain.
Successful negotiation or backfire, one way or the other, the markets will determine when they open next week
1 The FROB is a similar concept to the USA Government’s Troubled Asset Relief Program (TARP) established to purchase assets and equity from struggling financial institutions in an attempt to strengthen its financial sector
2 A report from the International Monetary Fund estimated Spanish banks needed a recapitalization injection of at least EURO 40 billion. However, the prime minister of Sweden Fredrik Reinfeldt - whose country is not part of the eurozone – is reported to have said that there was talk about up to EURO 80 billion being required. Indeed, current commentary is mentioning figures of EURO 100 billion.
Last Updated (Monday, 18 June 2012 14:13)