Spain – you got a second life (Zindagi Milgayi Dobara)

It would not be wrong to say that it was just Spain‘s weekend isn’t. When the status of Spain changed to –  It’s complicated. Spain’s government announced it is seeking up 100 billion euros ($125 billion) to bail out its troubled banking sector as the fourth-largest European economy teetered on drink of insolvency.

“We welcome Spain’s action to recapitalize its banking system and the commitment by its European partners to provide support. These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.”  That was an official statement by US Secretary Tim Geithner on Spain after the above package was agreed upon.

So the dilemma here is whether Europe would be willing to recapitalize Spain’s banks directly, or whether it would simply help Spain bail out its banks. And we can felt that answer seems to be somewhere in the middle. Europe is going to lend money to (Fund for Orderly Bank Restructuring)Frob, which is basically the Spanish Tarp; Frob, in turn, will use that money to recapitalize the banks.

The above can be put in the prospective of Killing two birds with one stone . As the Spanish government is getting debt finance from Europe, and the Spanish banks are getting equity finance from the Spanish government. Because the money is ultimately going to the banks, the Europeans and the Spaniards have an excuse for not imposing tough austerity conditions on Spain, that is very positive for Spain.

It can be speculated from here that the response from the European policy for Spain banking problems would soon come and the stimulus from central bank will ease the pressure on Spanish yields.

The above looks very positive but not to forget about Italy, the euro zone´s third largest economy. Will a rescue for Spanish banks be enough to contain market pressure on riskier debt or will it fuel this by depleting the funds available to deal with Italy should contagion spread?

I would like to keep the debate open quoting a former minister for economics from Turkey  “No catastrophic earthquake or tsunami has destroyed southern Europe’s productive capacity. What we are witnessing – and what is now affecting the whole world – is a man-made disaster that can be stopped and reversed by a coordinated policy response.”

One thought on “Spain – you got a second life (Zindagi Milgayi Dobara)

  1. well.. as it turns out ..the assistance (and not the bailout!) has done little to alleviate the fears.. infact investors are more concerned .. so is evident from the Spanish CDS which indicate that Spain is more likely to default now than before the assistance. the source fund from which assistance would come is a big issue due to the implied seniority structure over other loans.. a euphoria that was easy come easy go!


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