{"id":30169,"date":"2012-06-12T00:03:22","date_gmt":"2012-06-12T04:03:22","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/the-hidden-cost-of-the-spanish-bailout\/"},"modified":"2012-06-12T00:03:22","modified_gmt":"2012-06-12T04:03:22","slug":"the-hidden-cost-of-the-spanish-bailout","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/12\/the-hidden-cost-of-the-spanish-bailout\/","title":{"rendered":"The Hidden Cost of the Spanish Bailout"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Another one bites the dust.<\/p>\n

Portugal, Ireland and Greece have all accepted bailouts from the eurozone. Now Spain has followed in their footsteps.<\/p>\n

A Spanish bailout<\/strong> would seek as much as \u20ac100bn from the eurozone\u2019s rescue funds, to recapitalise Spain’s banks.<\/p>\n

So what is the deal all about \u2013 and can it save the eurozone?<\/p>\n

<\/span><\/p>\n

How a Property Bubble Ruined Spain<\/h3>\n

<\/center><\/p>\n

Spain\u2019s economic problems<\/a> are very similar to those of Ireland. Spain\u2019s eurozone nightmare started as a private sector bubble, rather than a public sector spending binge.<\/p>\n

Overly-low interest rates led to a huge property bubble in Spain<\/a>. Prices rose too far and too fast. Builders were encouraged to build too many properties. So you ended up with the lethal combination of over-supply plus over-pricing. Then came the bust.<\/p>\n

Unlike Ireland, Spain\u2019s bubble took time to deflate, partly because its banks used various \u2018extend and pretend\u2019 tactics to conceal the level of carnage in the market. But with the economy weakening rapidly, the property market is following suit.<\/p>\n

Most people didn\u2019t believe Spanish banks<\/a> were ever being realistic about the level of property-related losses on their balance sheets. And they were right. Last month\u2019s bailout of Bankia, Spain\u2019s fourth-largest bank, just proved it. And there are more problem banks where that came from.<\/p>\n

So here\u2019s the difficulty. The Spanish government needs to bail out Spain\u2019s banks. But the Spanish government doesn\u2019t have enough money to do that. It can\u2019t borrow more on the market, because bond yields are already too high.<\/p>\n

Up until now, Spain has tried to avoid requesting a bail-out from Europe. That\u2019s because it doesn\u2019t want to have the International Monetary Fund<\/a> and the rest of Europe telling it what to do.<\/p>\n

The deal now is that it will ask for the \u20ac100bn, but that it\u2019s solely to recapitalise the banks. That means it won\u2019t technically have to have the same levels of oversight as the bail-outs of Ireland, Greece and Portugal incurred.<\/p>\n

Europe\u2019s bailout funds will lend the Spanish government the money at low rates. This will then go into a specific fund created to recapitalise the banks (the Fund for Orderly Bank Restructuring, or FOBR).<\/p>\n

The Big Problem With the Spanish Bailout<\/h3>\n

<\/center><\/p>\n

We\u2019ll put aside the question of precisely where the money is going to come from for now. Italy, for example, will now have to guarantee 22% of the funds, which seems a stretch given the state that the country is in. I suspect they\u2019ll find a way to fudge it somehow.<\/p>\n

There\u2019s a bigger, deeper structural problem with this way of bailing Spain out. The loan from the eurozone almost certainly (in practice, if not in theory) will jump the creditor queue. In other words, if the Spanish government ever runs out of money, then the European loan will get paid ahead of any private sector bondholder.<\/p>\n

This is what happened with Greece. The private sector ended up taking huge ‘haircuts’, while the public sector (on paper at least) remained whole.<\/p>\n

By bailing out the banks this way, not only does the Spanish government end up owing more money, private sector lenders have been pushed down the line for payback. In other words, lending to Spain has just become even more risky.<\/p>\n

And by extension, so has every other European sovereign that might potentially need a bailout \u2013 Italy, for example. So the question is, why would any private sector investor in their right mind lend money to a troubled eurozone sovereign now?<\/p>\n

I can\u2019t think of a good answer. And that suggests that \u2013 without more action from Europe to prevent it \u2013 yields on European debt should rise even further.<\/p>\n

John Stepek<\/strong><\/p>\n

Contributing Editor, Money Morning<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek (UK)<\/a><\/p>\n

From the Archives…<\/strong><\/em><\/p>\n

Why You Should Wish For a Falling Market<\/a>
\n2012-06-08 \u2013 Greg Canavan <\/p>\n

Why the U.S. Dollar is Really Rising<\/a>
\n2012-06-07 \u2013 Keith Fitz-Gerald <\/p>\n

How This Bear Market Could Last Another 18 Years… Just Like Japan’s<\/a>
\n2012-06-06 \u2013 Kris Sayce <\/p>\n

The Banking Plan That Could Be A Game-Changer for Gold<\/a>
\n2012-06-05 \u2013 Dr. Alex Cowie <\/p>\n

Best Investment Strategies For the Times Ahead<\/a>
\n2012-06-04 \u2013 Nick Hubble <\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nThe Hidden Cost of the Spanish Bailout <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Another one bites the dust. Portugal, Ireland and Greece have all accepted bailouts from the eurozone. Now Spain has followed in their footsteps. A Spanish bailout would seek as much as \u20ac100bn from the eurozone\u2019s rescue funds, to recapitalise Spain’s banks. So what is the deal all about \u2013 and can it save … <\/p>\n

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