Why the Spanish banking bail out did not impress for too long

Sometimes trying to fix a problem can make it worse. Confidence is a precious flower. Pulling it up by the roots to see if it is healthy, or watering it too often, may not be wise.

It looks as if other member states and some EU officials wanted to organise a Spanish banking bail out before the Greek problems reappear following the Greek election. Spain’s government seemed to want to delay, and issued denials, before agreeing to a hastily compiled press statement last week-end confirming a future bail out of the banks using EU money.

It has led to a series of questions that do not necessarily have good answers for the Euro.

1. When will the new bail out fund itself be able to borrow the money to fund the Spanish banks? All bail out funds from other Euro members will need to be raised from markets,as all the main Euro countries are borrowers.
2. Will the EU loans, effectively made to the Spanish state to pass on to the banks, have priority over other Spanish government debt? If so, that reduces the credit worthiness of other Spanish state loans.
3. Even if the new debt does not have priority, Spain’s own credit rating is damaged, because the state now has more debt to assist weak banks.
4. How does Italy in particular afford her share of the Spanish bail out? Does it make sense for Italy to have to borrow more to help Spain, when Italy hersef has refinancing stresses ahead?

The model of big bank bail outs instead of controlled administration for the weakest is always problematic. It is especially problematic when large sums have to be found to prop the banks by states whose own credit rating is already on the slide and whose cost of capital is rising to high levels. The bail out has put both Spain and Italy’s borrowing costs once again under the market’s cosh.

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28 Comments

  1. norman
    Posted June 13, 2012 at 6:03 am | Permalink

    Confidence in European politicians (and I include British)? You’re having a laugh. That’s long gone surely.

    The USA sent out an early message that it wouldn’t stand behind banks regardless when they allowed Lehman to fail. I read the other day hundreds of small banks in the USA have since been allowed to fail.

    We in Europe have taken the opposite position, sending out the message time and time again that we’re going to bail out our banks with taxpayer money regardless.

    After private bond holders were given a 75% haircut on Greek debt, while the ECB / EU component was protected, does anyone really think European nations are going to be able to attract capital from the open market?

    Ready the presses, the politicians have blown it big time.

    • alan jutson
      Posted June 13, 2012 at 3:29 pm | Permalink

      Norman

      Just think what a difficult decision it is for them,

      What do I do with all of this scrap paper.

      Cover the cracks, or print more money.

      There may be another use, but you will have to wait until it hits the fan.

    • Will Rees
      Posted June 15, 2012 at 11:17 am | Permalink

      My understanding of of what made the collapse of Lehman’s so catastrophic was the US mis understanding of UK bankruptcy law. Thinking it would slowly unwind through Chapter 11. The contagion spread from their UK holdings having to shut everything down PDQ as per UK law.

      Since 2008, Hansard records 24 mentions of Chapter 11 bankruptcy: http://www.parliament.uk/search/results/?type=advanced&adv_exact=chapter+11+bankruptcy&page=0. Given only yesterday the likes of Credit Suisse published a report on how exposed the banking sector is to some now potentially possible developments :http://www.guardian.co.uk/business/2012/jun/13/eurozone-crisis-banking-sector-wiped-out, I would have hoped our legislators would have at least discussed Chapter 11 as a flame retardent.

  2. Adam5x5
    Posted June 13, 2012 at 6:10 am | Permalink

    another sticking plaster, only a temporary measure.

    There are only two possible ways out of this situation that Europe is in.

    1. Split the EZ apart and let the weaker countries devalue.
    2. Join the EZ into a tight Federal Union – EFU.

    I can see that option 2 will probably be the most likely outcome with Germany being the defacto government of the EFU.
    I hope that our government lives up to the promise of the ‘referendum-lock’ when this happens and we get our say.

    Until either of these two happen we are just going to see more and more of the same – country sees borrowing cost rise, country gets into trouble, country requests bail out, borrowing costs fall a smidgen, country borrows, country gets into trouble, borrowing costs rise… ad nauseum.

    • Denis Cooper
      Posted June 13, 2012 at 5:59 pm | Permalink

      Please see my reply to alan jutson further down the thread.

      Provided the treaty changes could all be put in the general form:

      “The eurozone states may do X”

      then there would be no referendum in the UK.

  3. Martin C
    Posted June 13, 2012 at 6:54 am | Permalink

    I hear the bang and clatter of a tin-can, being kicked a little further along the cobbles.

    • BernieInPipewell
      Posted June 13, 2012 at 10:26 am | Permalink

      Martin

      Some of the noise you hear may be the cans hitting the wall and beggining to bouncing back.

      Bernie

      • alan jutson
        Posted June 13, 2012 at 3:31 pm | Permalink

        Bernie

        They are starting to kick the cans uphill now.

        Then in due course they will roll back, and break their feet.

  4. Nick
    Posted June 13, 2012 at 7:10 am | Permalink

    Will the EU loans, effectively made to the Spanish state to pass on to the banks, have priority over other Spanish government debt? If so, that reduces the credit worthiness of other Spanish state loans.

    ==========

    Even if it doesn’t have priority, loading up on more debt makes the Spanish government less credit worthy.

  5. Nick
    Posted June 13, 2012 at 7:12 am | Permalink

    The real problem is simple. The real problem applies to the UK as well.

    Its government fraud.

    MPs hiding government debts off the books, to make it look affordable.

    e.g. No pensions on the books. Given a lot of MPs know about this, and its deliberate the conclusion is fraud. After all, the debts are so large they can’t be paid and they can’t be inflated away.

    Hence MPs plan to not pay your state pensions.

    Reply: That is complete nonsense. Of course Parliament intends to pay the pensions, and has always planned to pay them out of current tax revenue.

    • Duyfken
      Posted June 13, 2012 at 9:08 am | Permalink

      Response to JR’s reply: The ONS has just recently published its first, and experimental, estimates of UK pension obligations, as at the end of 2010, stating that £3.8trn was in respect of state pensions, representing 263% of gross domestic product (GDP).

      I do not support Nick’s allegation above but do suggest some attention should be paid by the government to this contractual obligation (I trust you agree it is contractual) and that it is included in the nation’s balance sheet.

      • sm
        Posted June 13, 2012 at 11:17 am | Permalink

        ONS estimates?

        What is the population of the UK again?

        This from 5 years ago.

        http://www.independent.co.uk/news/business/comment/city-eye-facts-on-a-plate-our-population-is-at-least-77-million-395428.htm

        How many government departments then must use these figures to plan ahead water,power, roads,housing, schools etc

        As a result , i have little faith in our political system, government figures or planning based upon it.

        • Duyfken
          Posted June 13, 2012 at 1:32 pm | Permalink

          I am unsure what your point is, sm, and I regret the link you have given does not work. Yes we may be of little faith so far as concerns the ONS (perhaps the job should be returned to the GAD), but their’s is a fault of execution not of intention. Surely you do not wish us to infer that because the present estimates are rubbish (= ONS’ “experimental”), it is of no use even to try to extrapolate and predict future numbers and needs.

          Anyway, I repeat that whatever methods are used (including that as argued by Mark below), forecasts are needed to gauge future liabilities even if just in ball-park terms, and such “soft” data should be recognised as a factor in the national accounts.

      • Mark
        Posted June 13, 2012 at 11:22 am | Permalink

        These numbers clearly depend heavily on the actuarial assumptions, and I would argue are much less useful than projections of the annual expenditure so that the cashflow to be financed by taxes or otherwise can be seen.

  6. Gerry Dorrian
    Posted June 13, 2012 at 7:13 am | Permalink

    Well said. Another reason why we need to get out of the EU before its unelected executives come knocking on our door to act as the lender of last resort alongside Germany.

  7. Richard1
    Posted June 13, 2012 at 7:16 am | Permalink

    It is also completely unclear how these funds will be used. Will they be injected in new equity into worthless banks as Gordon Brown did with Lloyds and RBS? If so that just pushes the problem further out and is another distortive subsidy. The EU should make it a condition that the new capital is injected on a proper economic valuation of these bust banks, probably meaning losses for bondholders, and wipeout for shareholders.

    • Mark
      Posted June 13, 2012 at 11:25 am | Permalink

      Lloyds was a healthy bank until Brown conned them into the HBOS takeover. It was HBOS, not Lloyds, that Brown bailed out.

  8. lifelogic
    Posted June 13, 2012 at 7:35 am | Permalink

    Indeed Spain and Italy cannot continue with borrowing at these rates for long. Germany needs to make up its mind. Does it want a single country of the EU and to take on all the unlimited liabilities or not. Sticking plasters once a week or so are fairly pointless.

  9. Brian Tomkinson
    Posted June 13, 2012 at 8:10 am | Permalink

    Every day we hear talk of the need to save the euro. It seems that whatever the consequences the euro must be saved. Why? It can only be because it is an essential building block in the deceitful road to the abandonment of democracy and the formation of a country called Europe. Why are these politicians and eurocrats allowed to be so destructive is there no one strong enough to stand up to them and halt their proposed multi coup d’etats?
    I read today in the Telegraph that Italy has a debt of 2 trillion euros and has to borrow 35 billion euros a month to pay the interest. Now they will have to borrow some more to help bailout the Spanish banks. Their Brussels enforced Prime Minister has said they don’t need a bailout and won’t even in the future. Where have we heard that before?

  10. oldtimer
    Posted June 13, 2012 at 9:22 am | Permalink

    So far, as I understand it, these “bailouts” are not yet actual bailouts but mere words. They are statements of (good?) intentions by member states in the EZ to approve the funding mechanisms that will then have to raise those funds to provide the bailouts in the fulness of (quite a long) time.

    If my understanding is correct, it is not surprising that lenders in the EZ sovereign debt market are taking less and less time to conclude that that these “bailouts” are little more than a mirage and that the price they should charge the supplicants for new debt is going up and up.

  11. Denis Cooper
    Posted June 13, 2012 at 10:02 am | Permalink

    This afternoon around 3.30 pm the Lords begin their Committee Stage for the European Union (Approval of Treaty Amendment Decision) Bill:

    http://www.parliament.uk/business/news/2012/june/lords-eu-bill-committee-stage-day-1/

    That is the Bill to approve the radical EU treaty change to which Cameron assented on March 25th 2011, without asking for any other treaty changes to protect our long term national interests.

    The Labour/Co-Operative peer Lord Foulkes of Cumnock has tabled amendments to the Bill:

    http://www.publications.parliament.uk/pa/bills/lbill/2012-2013/0003/amend/ml003-i.htm

    Firstly to require approval in a referendum before the Act can come into force and the government can finally ratify the EU treaty change.

    Secondly to delay the Act coming into force until January 1st 2013, the earliest date on which the EU treaty change can come into force under the terms of its own Article 2 – Merkel has been pushing for the ESM to come into operation a year earlier than originally planned, this July, without the necessary EU treaty change having come into force.

    Thirdly to prevent the Act coming into force if any of the present eurozone states have already left the euro before January 1st 2013.

    Assuming that the amendments are called and debated, rather than being ignored, it will be interesting to see how many Tory and LibDem peers queue up to denounce and block the proposals

    a) That we should have a referendum on this radical EU treaty change; and

    b) That the EU should respect the rule of law and the date of January 1st 2013 laid down in the Decision.

    • alan jutson
      Posted June 13, 2012 at 3:35 pm | Permalink

      Dennis

      What about this Referendum Lock. business.

      Has someone lost the key, or was the lock never put on the door.

      Thought it was supposed to be automatic.

      More Powers required by Europe, Referendum immediately.

      • Denis Cooper
        Posted June 13, 2012 at 5:54 pm | Permalink

        During the “debate” the minister Lord Howell said it was clear that under the “referendum lock” law there was no legal requirement for a referendum on this treaty change.

        “The way in which the European Union Act 2011 applies to the treaty change we are considering today is clear. The provisions of this decision, amending Article 136 of the TFEU, do not apply to the United Kingdom, so the decision simply does not attract a referendum.”

        The test is not whether a treaty change would or could “affect” the UK, but whether any of its provisions would “apply” to the UK.

        So if a treaty change can be moulded into the general form:

        “The eurozone states may do X”

        where X is something they cannot legally do under the present treaties, that does not “apply” to the UK, and so no matter how much it might “affect” us there is no referendum.

        To take it to an obviously ludicrous extreme, a treaty change which said in effect:

        “The eurozone states may take us much money as they please from the UK Treasury”

        would not trigger a referendum under the “referendum lock” law as it has been written.

        Last night the Tory MP Jo Johnson was asked on Newsnight whether the kind of changes being mooted for the eurozone would trigger a referendum, and he could only hum and haw about that.

        I’m sure every effort would be made to ensure that any necessary EU treaty changes were designed to avoid triggering a referendum in the UK.

  12. Lindsay McDougall
    Posted June 13, 2012 at 10:29 am | Permalink

    Just like one of the definitions of foreign aid: the insolvent giving to the insolvent.

  13. Leslie Singleton
    Posted June 13, 2012 at 11:19 am | Permalink

    Can it really be true that Italy, which hardly needs to borrow more no matter what the rate, is to have to borrow in the market at necessarily high rates to onlend to Spain (sorry Spanish Banks) at lower rates? Pure plain bonkers but maybe worse to come in that will it be the same but vice versa when Italy needs a bail out?

  14. Barbara Stevens
    Posted June 13, 2012 at 1:24 pm | Permalink

    I noted the comments on ‘pensions’ and the question of affordablity in the future, that’s how I understood the arguement taking place; I also noted the reply. We can afford pensions in this country quite easily, what we cannot afford is people coming here and taking a slice of the cake without full contribution over decades. We cannot afford our own not working and adding to the pot for their own and their fellow citizens. We have far to many coming into this country for the soul purpose of financial gain, and all that comes with it, housing, jobs, health, and education which the majority of citizens pay for via taxes. I like the proposal of having wealth before entry is aloud, but the figure is not enough; as for student families coming here definately NO. Most have no money and become dependant upon the state within a short time.
    Our problem is, we have no politicians who have the courage and guts to face up to the dangers we face. When they talk about we need educated people, well we already have them coming out of universities with no jobs to go to, we don’t need foreigners to fill jobs at all. We all know the failures of the banking service, but we face an even bigger danger from the EU with what they are now proposing, intergrated banking powers and political powers. What we face now is small change to what that would become. Some how Osbourne and Cameron do not give me much hope of protecting this country from these unelected boffins over the channel. May be it’s time the Conservatve party changed it’s leader before it’s to late.

  15. rd
    Posted June 14, 2012 at 5:29 am | Permalink

    It’s absurd that Italy has borrow at over 6% to lend to Spain at 3%.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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