Secular Café: The problem of the Spanish bailout

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The problem of the Spanish bailout Jul 10th 2012, 10:35 http://www.bbc.co.uk/news/business-18385411 Quote: To state the obvious, lenders to financially over-stretched eurozone banks and governments are likely to be encouraged by the signal from the governments of the eurozone that they will provide 100bn euros (£81bn) of finance to recapitalise - or strengthen - weaker Spanish banks... ...But the extent of any restoration of confidence may be muted, until we know the terms attached to the emergency loans and where precisely the money is coming from. An important issue point is whether the rescue funds will come from the European Financial Stability Facility, the temporary bailout fund that is being wound down, or its permanent replacement, the European Stability Mechanism. This matters because loans from the EFSF rank pari passu with loans provided by private-sector investors to a buckling sovereign borrower such as Spain, but credit from the ESM would be senior to private sector loans... ...So this means that the perceived quality of private-sector loans to the Spanish government would deteriorate - which, in theory, would have the perverse effect of making it harder and more expensive for Spain to borrow from conventional sources. An ESM bailout would classify Spain as a second-class borrower in a formal sense and actually delay its rehabilitation. But if the money were to come from the EFSF, well in those circumstances Finland has said it would fear that the money would be too much at risk of loss - so it is demanding collateral or security for its share of any such loan. Quite what this collateral would be is unclear. However, the important point is that if Finland gets it way, it would be getting preferential treatment on its share of the Spanish bailout. It's a mess. And here is a second complication. If Spain has succeeded, as it claims, in persuading Germany and the other eurozone governments to hand over the 100bn euros with no strings attached that relate to Spain's spending and taxing - to its budget - then Ireland would have a powerful case for demanding a renegotiation of its bailout package... ...But re-opening the Irish rescue package would be a hideous can of worms for eurozone members.

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