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.