What exactly will be the mechanism to effect a Spanish sovereign bailout?
A lot of pundits have come to the same conclusion that I have come to regarding problems in Spain, namely that the market is no longer willing to believe the country is solvent without European-wide intervention. The consensus, therefore, seems to be that Spain will be bailed out. I ask: by whom?
I think this question is important. Greece, Portugal, Ireland received sovereign bailouts which were easily funded by the Troika via EU and IMF funds. The goal here was to allow the countries time to make fiscal corrections which would allow market funding at a later date. As such, rollover of maturing issues would be funded via cheap loans from the Troika while fiscal deficits were reduced enough to enjoy market funding access. That was the rationale.
Spain is a different matter altogether. See Spain is the fourth largest economy in Europe with a GDP of 1 trillion euros. That is much bigger than the other three bailed out countries combined. So it simply isn’t possible to put Spain through a similar program because the funds to support such a program don’t exist. The rest of the eurozone cannot bear the cost. For example, just today Germany, the Netherlands and Luxembourg received ratings downgrades from Moody’s because:
there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required. Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form.
So what Spain has been given is a promise to monetise its debt via a vehicle funded by the other countries within Europe. That means that this bailout fund will buy up Spanish debt with the hopes that its purchases will allow Spain to rollover its debt and lower its high debt costs at the same time. This is a poor man’s bailout – and it’s not going to work. The European bailout fund will exhaust its funds and then we will be back to square one.
Moreover, Italy waits in the wings and the prospect of the bailout facility bailing out both Spain and Italy is laughable given the size of these two economies and their governments’ funding needs. I would suggest the only real possibility to save the euro from complete collapse is the ECB stepping in. And by stepping in I mean giving a backstop beyond mere monetisation. Short of this, the euro zone will fail and Spain (and Italy) will default. This will be apparent in a short period of months.
That’s it. Here are the links.
I don’t think John Williams does get it. The fed is out of bullets but people want them to do something anyway.