The recent decision of the Spanish government to ask for a $125 billion recapitalization program was not an easy one. The Greek, Irish and Portuguese preceding bailouts were making such a decision even more difficult for proud Spaniards. However, the Spanish package is substantially different from its predecessors and allowed the request to proceed on the basis of the existing austerity program put in place by the Spanish government, without further sacrifices for the population.
1. Spain is not a bankrupt country. With a 78% debt/GDP ratio by the end of 2012, it is below many European countries, especially France and Italy, the two most indebted large countries of Europe. This facility will require, however, the guarantee of the Kingdom of Spain. It will further deteriorate this ratio to approximately 90%.
2. The Spanish largest banks are sound and solid.. Banco Santander and BBVA are global banks, diversified way beyond Spain, and particularly in Latin America. They are capable to absorb the deterioration of the Spanish real estate market.
3. It is the Spanish savings banks who need to be rescued.. A lot has been said about Bankia, who needs somewhere between $ 25 and 50 billions recapitalization: it is an aggregation of seven savings banks. The Spanish government has already bailed out Caja de Madrid, the largest one, representing 52% of Bankia.
How will Europe fund this program?
It is the intention of the Eurozone to finance this program without recourse to the IMF..
It will use the European Financial Stability Fund (EFSF) and its successor the European Stability Mechanism (ESM). However, both have lost their AAA rating following the downgrading of France last year, A recent bond issue by the European Financial Stablilty Mechanism (EFSM) was priced at 3.89% for 10 years, roughly three times the German cost of financing. The question of the creditworthiness of the European signature is complex. So far, small amounts have been borrowed on international capital markets.
I am, however, despite the challenges of the country, confident that Spain is able to manage its banking sector. It requires a strong central government stewardship that will come from the substantial stakes taken by Madrid in its ailing cajas de ahorros. Spaniards are not Greek. They do not expect the world to come to their rescue. They will collectively work at the restoration of the prestige and the credibility of the country.
And now... let's watch the Loch Ness Monster: Italy.
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