Daily commentary: On the Spanish bank bailouts

In the links today are a lot of links in both English and Spanish about the bailout of Spain’s fourth largest bank Bankia. With the partial nationalisation, Spain is moving one step closer to Ireland in committing the sovereign government to bank liabilities that have the potential to greatly increase sovereign debt. If you look at Spanish sovereign metrics, the deficit is high but the debt to GDP level is still relatively low despite the crisis because it started from a low base. The real problem in Spain is private debt and the insolvency of the banking system.

There are a lot of views as to what Spain should do to deal with their problem. The conventional view is that Spain should move in the same direction that Ireland has and support the banking system. Doing so will likely cause sovereign yields to become so elevated that the sovereign would require its own bailout. So Spain is in a difficult position. Like me, Nouriel Roubini argues that the EU should allow Spain’s banks to tap the EU bailout fund, something Christine Lagarde has been pushing. I call this the EuroTARP proposal and believe it is gaining momentum.

How this EuroTARP is executed however is critical in terms of popular sentiment. It is still possible to recapitalise the banking systems using public and private money on a European wide level while still allowing the most distressed banks to go under and their creditors to take haircuts. The optimal way of dealing with this is to make it a systemic recapitalisation issue across Europe, thus preventing contagion when the most sick banks are allowed to fail, stripped of bad assets, and their subordinated debt written down. Europe needs to get rid of the bank problem once and for all.

I don’t think they have the political will to deal with this until crisis in Spain erupts.

That’s it. Here are the links.

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