Spain's Bailout: Glass Half Full or Half Empty?

       The 100 million euro infusion into Spanish banks would seem to be a very good thing as since the fear about Greece leaving the euro has built up there's been much collateral damage in Spain as well as Portugal and Italy. This was why Greece potentially leaving the EU is a big deal as once this real possibility raised itself depositors started a run on the banks in Spain and company as well.

       The object is to calm the markets about the solvency of Spain's banks. However there is a glass half empty way to look at it as well:

       "European officials shouldn’t be surprised if their latest unveiling—a rescue plan for Spain’s troubled banks—fails yet again to impress markets or resolve the continent’s crisis. After all, whatever the package of up to €100 billion in loans might do to calm fears about Spain’s banks for the time being, it may only increase concerns about the health of the sovereign itself."

       "Because the panoply of European and supranational institutions like the International Monetary Fund can't lend to banks directly, they will effectively be lending money to Spain to inject into its banks instead. Indeed, Dow Jones, citing a European official, reports that Spain’s bailout fund (the Fondo de Reestructuracion Ordenada Bancaria, or FROB) will borrow funds from the euro zone’s temporary Emergency Financial Stability Facility, or EFSF , at least until the permanent European Stability Mechanism fund is up and running."

       http://www.cnbc.com/id/47754430

       "What all the fancy-sounding acronyms in the world can’t obscure is the fact that Spain will effectively be on the hook itself for whatever sum is borrowed to bail out its banks. As Morgan Stanley economist Joachim Fels put it in a client note Sunday, “a loan by the EFSF or ESM to the Spanish bank restructuring fund, FROB, hardly counts as a circuit breaker as it raises the Spanish government’s contingent liabilities.”

       "And €100 billion is no chump change. It amounts to nearly 10 percent of Spain’s gross domestic product; the country last year was already running a deficit of about 9 percent of GDP. It isn’t clear how much of this sum will be borrowed up front, but it is clear that increasing Spain’s debt load at a time when its recession is still deepening is hardly a way to shore up investor confidence in the nation or the broader euro zone. In fact, such a transfer of private-sector debts to the public sector (which then triggers further austerity measures) has perhaps been one of the biggest missteps of the crisis; it hardly seems prudent now to double-down."

       Still there is some hope for the bailout:

      "A Pyrrhic victory it will certainly be if Spain’s banks get help at the cost of further eroding the solvency of the sovereign or the sustainability of the euro zone. Only true political and fiscal union—putting the full bloc’s pocketbook behind struggling nations like Spain— is likely to shore up investor confidence. If it appears that the bailout for Spain’s banks is but one small step in that larger direction, then investors might give Madrid’s latest maneuver the benefit of the doubt. If not, Europe’s crisis remains unfinished."

       Indeed, evidently according to reports in Germany it may actually be a step in this larger direction of fiscal union.

       http://diaryofarepublicanhater.blogspot.com/2012/06/more-big-eu-weekend-news-eurobonds-and.html