The markets are likely to hurrah this morning as news of the Spanish bailout is celebrated. Spain’s banks have been given a €100 billion bailout from the EU and the headline could easily be interpreted as good news. The reality, however, is that this bailout is incomplete, unratified and unpopular.
Furthermore Spain’s bank bailout has been largely free of conditions – unlike the bailouts of Greece, Portugal and Ireland, they will not have to suffer enforced austerity. This strengthens the hand of parties like Syriza in Greece who want to get rid of austerity – let’s not forget they are Greek elections on Sunday. Therefore, this bailout makes the EU and the Euro project even more fragile as the risk of sovereign default and eurozone exits becomes more real.
Firstly the EU is yet to specify which bailout fund will pay for Spain’s banks. Will it be the EFSF (European Financial Stability Fund) or the ESM (European Stability Fund) which is not yet signed into law? If it is the EFSF – there are legal issues surrounding it. Money was paid into the fund by Eurozone members on the premise that it would only be used for sovereign bailouts, not bank recapitalisations. There is pressure from Holland and Finland, not to mention other states, who want to vote against the bailout before it is agreed.
Secondly, Spain technically has to backstop the loans to it’s banks. Many economists believe that the tipping point where a nation can no longer pay back its debts is when the debt/GDP ratio is over 90%. Now with this bailout equivalent to 10% of Spain’s GDP, Spain is pushed over that level and onto the path to insolvency. Moreover, this Spanish federal debt does not include that of its regions – which adds another 13% onto it’s debt/GDP ratio.
One last bugbear that the markets seem to be forgetting is that Spain’s bailout is without many conditions. Unlike the bailouts of it’s other European members, there is no harsh austerity requirements attached. As Greeks go to the polls once again on Sunday – I would not be surprised if they give a mandate to Syriza to rule because of their unjust treatment. With Syriza in charge, the austerity package would be in ripped apart, Greece would be truly insolvent and would not be repaying the EU’s bailout. Long term, this means exiting the Euro, short-term they are likely to be subsidised by Germany. But how long would the Germans be prepared to put up with that? Then what about when Spain needs a bigger bailout? Or Italy needs one? They are too big to fail and too big to bail. Although we are now veering into the realm of the hypothetical – I would imagine this could set the precedent for Spain and Italy to leave the Euro.
Even if that doesn’t materialise soon, it is impossible to see how this bailout solves the Eurozone crisis. I am shorting the FTSE now in out of hours trading at 5560 with a stop loss at 5660. Once the bailout mania disappears, I think we will see the markets realise the dismal fate of the Eurozone once again and they will fall.