Spain moves nearer to full-scale rescue

 
Towers of one Euro coins Is Spain heading towards a full-scale rescue?

Once again Spain, and to a lesser extent Italy, is being forced towards a full-scale eurozone/IMF rescue programme, because of the inter-connectedness of public-sector and banking liabilities.

As the price of Spanish government debt plummets, that generates losses for Spain's banks, which hold around 250bn euros of the country's government bonds, equivalent to a third of central government debt.

That then increases the size of the hole in their balance sheets, and therefore the scale of the official rescue from taxpayers they will eventually require.

But, as importantly, the more that investors and savers doubt Spain's creditworthiness, the more they doubt its ability to stand behind its banks.

This may not be wholly rational, given that the eurozone has promised 100bn euros of rescue funds earmarked specifically for rescuing Spain's banks. But it is also not wholly irrational, since it is by no means clear yet how, when and even whether the eurozone will succeed in turning that 100bn euros into a liability of the banks alone, without adding to the burden on the financially stretched Spanish state.

One consequence is that Spanish banks are becoming more and more dependent, for their very survival, on exceptional funding from the European Central Bank.

"The chilling statistics"

Here are the chilling statistics. In the first five months of the year, Spain's banks lost 3% of their deposits as savers moved their cash to perceived safe havens, such as Germany, or spent their accumulated savings to make up for the collapse in their incomes.

Meanwhile, in not much more than six months, Spanish banks' borrowing from the European Central Bank has risen from 106bn euros (in November 2011) to 365bn euros - or 9.5% of all their borrowing needs.

The relevant comparators are not encouraging. The banks of Ireland and Portugal, two countries already in formal rescue programmes provided by the Eurozone and IMF, are dependent on funding from the ECB to the tune of 13.5% and 10% of their respective liabilities.

Or to put it another way, the ECB's support for Spain's banks is already around the levels in Ireland and Portugal at which the ECB felt that enough was enough, and put pressure on eurozone governments to provide a full-blown rescue programme for those countries.

Which is partly why investors tell me they no longer believe that Spain can muddle through just with a rescue provided by the eurozone's bailout funds, the EFSF and ESM, of its banks.

What may have tipped it over the edge is the disclosure last week that Spanish regions, led by Valencia, will need loans from central governments so that they can repay their debts (some 15bn euros of Spanish regional government debt comes up for repayment in the second half of this year).

Spain's fragility is one you know well: the leg bone of an economy in a recession estimated to last two years is connected to the knee bone of undercapitalised banks is connected to the thigh bone of regions with debts they can't repay is connected to the hip bone of a government which cannot borrow at affordable rates.

Them financial bones stand or fall together, and right now they look set to fall.

Running out of time?

How much time does the Spanish government have to ward off disaster?

Well in part that is down to the patience of the European Central Bank - or rather its appetite to increase its exposure to Spain's banks.

It is also down to Spain's appetite for paying penal borrowing costs for a period.

What is particularly frightening about what has happened to Spanish debt prices today is not just that they imply Spain would have to pay an unaffordable 7.5% to borrow for ten years - which is the normal litmus of the difficulty being faced by a government when borrowing.

Perhaps more serious is that it would have to pay interest of 7.4% to borrow for five years and more than 6.5% when borrowing for as little as two years.

You, dear reader, would probably pay less than 6.5% when borrowing for two years. And you are not a sovereign government (I presume).

In other words, there is no temporary refuge for Spain in borrowing for shorter periods. Its day of reckoning, in the sense of a decision on whether to become the first really big eurozone economy to subject itself to the humiliation of being run from Brussels and Washington, by the European Commission and IMF, looms.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 37.

    @1.Raceice
    The Spanish Gov & Establishment seem to be in denial

    That goes for the whole EU elite, they've started German mentored training programs apparently in the belief that Spains unemployment is due to lack of training. whilst repeatedly told the steps necessary to fix the Euro & their economies, they continue to make the same mistakes & use sticking plasters to kick the can.

  • rate this
    0

    Comment number 36.

    Simply this is how the economies work.

    Socialising debt as the banks and their coterie continue to coin it in.
    Like it or lump it. It's what we have become.

    Do you really expect bankers to behave?
    They are in it for the money. Our money. And if we haven't got any - then they will lend us some. Get us into debt. And so it goes on. And on. Clever bankers. They know they have us by the short and

  • rate this
    0

    Comment number 35.

    Robert,
    isn't the tradgedy here that despite all the austerity measures inflicted on the poorest of society, it will all have been for nought in Greece, Ireland, Spain, Italy, France and THE UK!
    Clearly a social revolution is required.

  • rate this
    +2

    Comment number 34.

    32.
    nautonier

    This comment was removed because the moderators found it broke the house rules.

    ___

    No it wasn't, nautonier was just pointing out the fact that the monetary systems we're all forced to use are scams. ;)

    No need to explain, we know why it was removed (aside from the false reason above)

  • rate this
    +1

    Comment number 33.

    The pain in Spain falls mainly on the people who live there. Unless they are well connected, of course.

  • Comment number 32.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    0

    Comment number 31.

    The EZ crisis never seems to be out of the news for long before a new episode unfolds, sadly all too similar to the last. New script writers are needed as its getting boring. They really have to think of a new story line. Cliff hangers like 'the Greek exit' never materialise. A slow recovery is not believable and too dull so we all wait for a new, unexpected twist only to be disapointed yet again.

  • rate this
    0

    Comment number 30.

    Is Andorra a tax haven? If so, conveniently located to liberate some of the missing believed stolen 13trn. If IMF model solutions continue to fail, a dose of gunboat economic diplomacy could offer the next best option, France blockade Monaco and so on.

  • rate this
    +14

    Comment number 29.

    Humiliation ? we are talking about civil unrest and peoples lives now, not someone having the guts to admit they have been wrong for the last 4 years and have actually made the situation worse by their actions not better......

    Icelands model although not perfect and not as rosy as it would appear was at least a step in the RIGHT direction....

  • rate this
    +8

    Comment number 28.

    26.Eddy from Waring

    That's the problem, by mixing the casino banks with the retail banks they put our small slice of the pie in with the rest. It's that small stake that is being used to blackmail us into bailing out the wealthy.

    I expect my pension to be worthless by the time I come to collect. At least a reset now gives me a chance to build a new smaller one and my kids will have some hope.

  • rate this
    +3

    Comment number 27.

    Does everyone see the absurdity of the fact that CitiBank and General Motors are "too big to fail," but Spain isn't?

    Something is seriously out of whack here.

  • rate this
    +1

    Comment number 26.

    25.Argent Pur

    "...Just who is all this debt owed to ?..."

    ===

    Unfortunately, a lot of it to ordinary people's pension funds, plus their savings too.

    Otherwise I'd have no hesitation in seconding.

  • rate this
    -1

    Comment number 25.

    The wheels are coming off capitalism. It concentrated too much wealth into the hands of too few and this is the result.

    Just who is all this debt owed to ? The rate rigging banks? The money laundering banks ? The tax dodging super rich ?

    I suspect it is..so don't pay. The parasites have screwed us for years so it's time we called a halt, cancelled the debts and reset the system.

  • rate this
    +3

    Comment number 24.

    It depends to some degree, I think, on the patriotism of Spain's rich.

    It's something that's always demanded of the poor in wartime, or other hard times, but no one seems to comment, when the rich decide to up sticks when things get tough.

    Let's hope that just for once, they set an example for their peers in other countries to follow.

  • Comment number 23.

    All this user's posts have been removed.Why?

  • rate this
    +17

    Comment number 22.

    Money talks - as the rich get richer who will start and really highlight the human cost - the loss of homes,jobs and any future for too many people who just wanted to get by.
    Destroying the infrastructure of countries by austerity measures and without supporting growth is nonsense - it won't help anyone except the rich (again).
    The rich and powerful got us into this mess took the money and ran....

  • rate this
    0

    Comment number 21.

    Yodhe

    Actually if you have some collateral ( as most indebted countries or their banks as surrogate borrowers are being asked to provide) you can get a very good loan rate. A major bank is currently offering a 60% mortgage at 3% fixed for five years. Just search on one of the comparison websites.

  • rate this
    +11

    Comment number 20.

    Where will it all end? I assume that as the "leaders" don't have the stomach for meaningful action, the markets will devour country after country until only Germany is left.

    It is easy for Berlin to "wait and see" while Southern Europe burns, much harder when they have to go to the IMF themselves.

    Trillions wasted - millions of lives ruined - all preventable - hope it was worth it.

  • rate this
    +1

    Comment number 19.

    Rescue? Leaving the Euro looks all the more likely however reluctantly they are pushed that way. A 'Rescue' also assumes that the Spanish public will put up with the ECB ideas of medicine.

  • rate this
    0

    Comment number 18.

    "You, dear reader, would probably pay less than 6.5% when borrowing for two years."

    And you would be quite wrong, most personal loans tend be around 7.5% APR in my recent experience, for someone in good financial standing.

 

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