Spanish bank bailout unlikely to succeed
June 8, 2012 18 Comments
It has been abundantly clear that Spain would need a bailout for its sick banking system, and rumours have emerged that this could happen as early as this weekend. I doubt that the details of a plan will be agreed so soon as an independent stress test of the Spanish banking system is still being carried out by Oliver Wyman/Berger (results due June 18th). Much more likely, EZ leaders will once again to plan to make a plan to make a plan to bail out the Spanish banking system. What are EZ policymakers trying to achieve with a Spanish bail bailout, and can they succeed?
With rumours about an imminent Spanish bank bailout at fever pitch, many have asked “why now?” EZ leaders will try to achieve three things with a bailout for Spanish banks.
First, there is a direct connection between Greece and Spain in terms of their banking sectors. We have witnessed a “bank jog” in Greece for months, which intensified in May. There were some reports of a bank run in Spain as well, though this is only true among foreign depositors in Spanish banks. A bailout for Spanish banks could be aimed at preventing a bank run from ripping across the periphery. EFSF/ESM money for Spanish banks is unlikely to succeed in avoiding a bank run, however. Depositors in the EZ periphery are withdrawing their money from banks over concerns about their countries leaving the EZ and their savings being redenominated and devalued away. A bailout for Spanish banks is very unlikely to allay these concerns.
Second, EZ leaders hope a bank bailout will reinstill confidence in the Spanish banking sector. Uncertainty about the size of the black hole in the Spanish banking system has been corrosive for investor confidence. Unfortunately, this too seems unlikely to succeed. There are currently two stress tests being conducted on Spanish banks, one by the IMF (published June 10th) and one by Oliver Wyman/Berger (published June 18th). The IMF stress tests have been completed and reportedly envision a €40bn bank recapitalization. This would make the Spanish bank bailouts cheaper than those for the Irish banking system (already upwards of €60bn), a veritable bargain! It is possible that EZ policymakers will wait to devise a figure for the bank bailout until Oliver Wyman/Berger publish the independent bank stress tests later this month. If the underlying assumptions in the independent stress tests involve years of recession and a further 20% fall in the property market as the base case, then they may be credible. There is a chance that, as with the independent stress tests done on Irish banks by Blackrock, the underlying assumptions for the stressed case actually become reality and further bank recapitalizations seem necessary.
Third, a bailout for Spanish banks would be aimed at avoiding one for the sovereign. External capital flight from Spain over the past few months has made Spain’s external debt position even more sustainable. In the absence of capital inflows—unlikely as investors are not exactly flocking to Spain and the external economic environment means Spain’s export markets are not booming—Spain will need official financing to plug the gap. Furthermore, a bank bailout for Spain will most likely be funneled through the state (or through FROB) rather than being injected directly into banks. This means that the cost of bank bailouts will be foisted onto the sovereign’s balance sheet, making Spain’s public debt position look more unsustainable.
Even if a bailout for Spanish banks does not come this weekend, it will come soon. Unfortunately, it is very unlikely to succeed in drawing a line under concerns about Spain’s solvency. In the absence of economic growth, a bailout for Spain’s banks will be followed by a bailout for the sovereign as well.
For more in-depth analysis on Spain, its debt sustainability and its path forward, see Roubini Global Economics’ Spain Scenarios: Bring on the Bailout.