After months of resisting external aid, Spanish budget minister Cristobal Montoro said European institutions should help shore up the nation’s lenders.
In fact reports suggest that there is a plan in place that would allow Spain to recapitalize its weakest banks with help from European partners.
But in a Financial Times editorial, PIMCO’s Mohamed El-Erian says there’s a reason Spain had long avoided emergency European funding:
“So far, emergency European funding has been impossible to exit, like a “roach motel”. Rather than act as a catalyst for crowding in private capital needed to restore growth, and financial viability, public money has provided the private sector with the possibility to exit programme countries at a much lower cost; and exit it did. As a result, governments have become highly dependent on official aid to cover their budget needs, meet interest obligations and roll over maturing debt; and domestic companies have been starved of the oxygen that is so critical for investment and job creation.
No wonder, growth and solvency remain so elusive for the programme countries, including in Ireland and Portugal where citizens have been generally supportive of their governments’ policies. The possibility that the counter factual — i.e., no access to external emergency financing — could have yielded a worse outcome is no excuse for repeating the mistake in Spain. Indeed, This is more than just in the country’s self interest. Given its size and crucial role in any revived eurozone (along with France, Germany and Italy), Europe cannot afford Spain to be a long-term ward of the state.”
Instead El-Erian says the European officials should focus on a vision for the eurozone in the next three to five years, on schemes that would help stabilise the region, and Spain needs to focus on its domestic policies.
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