Sunday, June 10, 2012

Spain: a bailout but no ‘bail in’

by Michael Roberts

So Spain is to join Greece, Ireland and Portugal in an EU/IMF bailout package. The Spanish government is only asking for funds to recapitalise its banks, which have huge ‘bad debts’ after the collapse of the Spanish property bubble. The Conservative government is desperate to avoid a ‘full’ Troika package to fund its government debt because that would mean even more draconian fiscal measures to cut government spending dictated by the EU Commission, the ECB and the IMF. So only £100bn is being asked for instead of €350bn that would be needed for a full bailout.

But the government won’t escape the consequences. The bailout constitutes nearly 10% of Spain’s GDP and will be added to the sovereign debt level, taking it to nearly 100% of GDP. At that level, it will be extremely difficult to stop the debt becoming out of control, or ‘sustainable’. Research from many sources (Reinhart and Rogoff, McKinsey, the BIS) shows that when public debt goes over 90% of GDP, it usually leads to economic recession.

As it is, Spain is already in a deep recession, with GDP expected to fall by around 2% this year and further in 2013. So there is no way that the Spanish government can meet its fiscal targets, already set by the EU Commission, to get the budget deficit down to 3% of GDP in 2013 from 8.5% in 2011. That’s the biggest fiscal tightening in the history of Spain and it can’t be done anyway. Indeed, the EU Commission itself reckons Spain’s budget deficit will still be around 6% of GDP next year. Fiscal austerity in Spain is already failing and now the government is taking on even more debt.

What’s really galling is that the Spanish people must take on the full burden of recapitalising their banks. Just as in Ireland, where the taxpayers now have a burden of 25% of GDP over the next 15 years to repay the loans incurred to restructure their banks, Spanish people must now do similar. The banks’ bond holders (who are other banks, pension funds, insurance companies and hedge funds) are going to be repaid in full. Even though they took a ‘financial risk’ when they bought the bonds of the banks, the bondholders will lose nothing because the government will take on the full burden.

There may be a bank bailout but there is no ‘bail in’ of the bondholders. Instead of the government nationalising the banks, sacking the failed old senior executives and reducing the costs by refusing to pay the bondholders and shareholders, the Spanish people must leave the banks in private ownership and pay all the bills.

The cruel irony is that Spain will probably forced into a full Troika package anyway later this year because Spain’s economy is so weak and unemployment is so high that the government cannot meet its fiscal targets and bond markets will demand higher and higher rates of interest to lend money to the government.

So it’s handouts for the bankers and their backers and austerity and cuts for the rest of Spain.

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