Spain finally made the painful but inevitable request for
financial assistance. Out of essential need, Spain could no longer afford yields
commanded through their sovereign bond auctions. Such yields look to be more a
product of systemic issues, as opposed to simply a banking matter. But then, what banking matters aren't systemic.
Spain's Finance Minister Luis de Guindos told reporters that
Spain negotiated an assistance package of some 100B euros, directed only to
capitalizing banks through Spain's new Fund for Orderly Bank Restructuring.
Previously, Spain lobbied for funds to be diverted directly to their banks.
Now, Spain has its conduit of European money to its banks for a purpose.
Witnessing the harsh demands placed upon other bailout
countries in terms of sovereign budgets banished into austerity and resulting
political consequences, Spain wants some sovereign space. They don't want to be
told how to operate Spanish sovereign fiscal policy and see potential political
disruption.
Consequences of negotiations look very different from
previous aid packages to other countries. That is, money is going to Spanish
banks through a sovereign conduit. Currently, one can be certain that European
and IMF lenders will want to see broad economic benefits from such bank
recapitalization. To such an extent that tax revenue will have to be
dramatically increased to offset budget deficits.
In other words, it appears Spain has hedged its sovereignty
as much as possible, obtained a loan as small as possible, and put the money
were they retain control as much as possible.
Spain’s EFSF/IMF loan will alleviate sovereign funds having
to be allocated to a recent bank nationalization, being Bania SA. Stress tests
show other banks don’t need 100B euro. What does show are Spanish debt yields
and high unemployment, together with high budget deficits. Should Latin America
decline further, more money could be needed simply to cover Spanish bank losses
in that region.
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