Just don’t call it a bailout

WHATEVER the €100 billion ($126 billion) made available by euro-zone countries to recapitalise Spain’s banks looks like, the Spanish government would really rather not call it that. “In no way is this a rescue,” said Luis de Guindos, Spain’s economy minister, while announcing that a deal to rescue Spain’s banks had been done in a two-and-a-half-hour conference call with the 17 euro-zone finance ministers on June 9th. “It’s a loan with very favourable conditions.” The prime minister, Mariano Rajoy (pictured above), who left his underling to front the bailout, was meanwhile busy giving the impression that all was proceeding as normal. When he eventually appeared before the press the following day, Mr Rajoy made repeated reference to “what happened yesterday”, as if the rescue were an embarrassing incident that, out of politeness, ought not to be mentioned by name. Then he flew to Poland to watch some football.

This was understandable, given the importance of confidence to banking, if slightly comical. Yet it was also emblematic of Spain’s approach to its banking crisis, characterised by a mixture of bluster and denial that has ultimately proved to be self-defeating. The good news is that this loan signals that the country is at last facing up to the problems in its banking sector. A hundred billion euros is at the high end of what most analysts estimate is required and should be enough to protect Spanish banks against further shocks.

The government said it would specify how much money the banks needed after it received an assessment from two independent consultancies, Oliver Wyman and Roland Berger, due by June 21st. The loan amount is more than double the €40 billion capital hole identified late on June 8th by a report from the International Monetary Fund, though the IMF had warned Spain would need an additional buffer on top of this amount. Last week Fitch, a rating agency, said Spanish banks might require €50 to €60 billion in fresh capital, or up to €100 billion if things became really bad. The government needs to request enough money to persuade markets that it will not underestimate needs for a third time—as it did with provisioning orders totalling over €80 billion in February and May, which have proved insufficient.

The bailout will be channelled through the state-backed bank bailout fund, the FROB (Fund for Orderly Bank Restructuring), and so will count as sovereign debt. If used in total, it would add about 10% of GDP to Spain’s debt burden. Even then, the debt to GDP would probably peak at below 100% in 2015. This is still less than other highly indebted countries in the euro zone.

Yet several details of the bailout are still fuzzy. First, it is not clear exactly what conditions would be attached to the aid. The government claimed there were no conditions for the rest of the economy. Other European ministers might disagree. The Eurogroup praised Spanish reforms but said it would also be monitoring deficit procedure and structural reform carefully. “Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance,” in their words. The Eurogroup also mentioned “horizontal structural reforms of the domestic financial sector”, which could mean something.

Second, the Eurogroup did not specify whether Spain would be borrowing from the existing rescue fund (the European Financial Stability Facility or EFSF) or from the new European Stability Mechanism which is due to start in July. This matters because loans from the EFSF are not senior to other bondholders, whereas the ESM loans do have priority over privately held debt. A loan from the latter could spook investors in Spanish sovereign bonds.

How will the bailout affect Spain’s ability to borrow in the markets? Cleaning up the banking system would be a positive step but it is not enough on its own. The country’s economy is expected to shrink this year and the next. The bank bailout is unlikely to reverse the downward momentum, even if it eases the country’s credit crunch. If Greece leaves the euro, it is possible that Spain will find itself shut out of the markets.