Monday, June 11, 2012

Spanish Bailout Shows Europe Still Doesn’t Get It

June 11, 2012

The challenge of bailing out Spain’s banks is compelling Europe’s leaders to confront a question they had hoped never to contemplate: How to prevent financial and economic malaise from overwhelming the euro area’s fourth- largest economy.

So far, their actions suggest they’re sticking with the strategy they pursued in Greece and expecting different results. They’d better think again.

The agreement last weekend to provide as much as 100 billion euros ($125 billion) to Spain’s banks shows Europe’s leaders are at least beginning to recognize the magnitude of the task. The amount matches some of the higher estimates of the capital the banks will need to offset heavy losses related to Spain’s real estate bust. As such, it might help inspire the confidence necessary to slow the flow of money out of the country and lower the odds of an all-out bank run, particularly if Sunday’s Greek parliamentary elections set that country on a path to leave the euro.

The deal, though, fails to address a fundamental issue that has been spooking markets: This is the worst possible time for Spain to borrow 100 billion euros. Under the agreement, any amount used to bail out Spain’s banks will be added to the country’s government debt, potentially pushing it to a net 70 percent of gross domestic product, from about 60 percent today. Spain is already struggling to sell its government bonds to anyone other than its own banks; the sudden increase in debt could completely cut it off from private financing.


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