Photo: Wikimedia Commons
Bank of America Merrill Lynch’s European economics group led by Ruben Segura-Cayuela weighed in this afternoon on the Spanish bailout.“We have argued that for a program to recap banks to be successful it needs to come with large conditionality,” they wrote.
More on that:
We believe the program should come with strong conditionality in order to have a substantial impact on credibility, since there is a risk that with mild conditionality yields do not come down enough or go substantially up again if there are negative news on growth or substantial fiscal slippages.
There has been some confusion over the conditionality attached to the bailout Spain will receive from the EFSF and the ESM, with Spanish prime minister Mariano Rajoy quoted yesterday as saying, “There’s no conditionality of any kind. This does not affect the deficit.“
That was followed by an article in El País this morning stating that “In return for subsidized rates, Spain cedes sovereignty over its financial system, but also loses tax sovereignty, contrary to what the Government said yesterday.”
The BofA economists explain why strong conditionality is so important: there is a “shortage of funds in the EFSF,” and “failure to convince markets that the Spanish banking issue is tackled and that Spain debt is on a sustainable path will require a new response from the euro area.”
The note provides this table that shows around 350bn euros left in the combined bailout funds. This includes contributions from the IMF, which BofA points out are not a given as it’s unclear how they participate in a program to recapitalize banks.
Here are the numbers. Assuming the 100bn euro bailout announced for Spain yesterday, that leaves Europe with around 250bn euros worth of rescue funds:
Photo: BofA Merrill Lynch
The bottom line is that there already isn’t much cash left to support Spain if its yields rise again and the sovereign needs to return to the table for more money. BofA says without strong conditionality attached to this bailout, Spain may be subject to the mercy of the bond markets when things don’t go according to plan.
That is something Europe definitely cannot afford at the moment.
“The devil will be in the details,” write the economists. “To fully assess the likely impact of the program we need to wait until all the details of the Memorandum of Understanding are released, which should be within the next 3 to 4 weeks.”