Photo: Alex Proimos on Flickr
ZeroHedge points us to a scary number from J.P. Morgan’s David Mackle—a plan to finance Spain through the end of 2014 and if that plan were to include bank recapitalizations and recapitalize its banks would cost the EU/IMF/ECB troika a whopping €350 billion ($436 billion).That could consume more than half of the €500 billion in funding for the European Stability Mechanism that has not already been devoted to the rescues of Greece, Ireland, and Portugal. The ESM is the new European bailout fund set to go into effect later this summer.
Of that €350 billion, J.P. Morgan expects €75 billion to go to the recapitalization of Spanish banks.
J.P. Morgan explains that massive number:
Before Spain asks for admission into the liquidity hospital we may see the SMP reactivated. But, given that the Spanish situation looks increasingly like a solvency crisis – the government is not solvent enough to recapitalise insolvent banks – the ECB is unlikely to view the SMP as an appropriate long term response to this problem. More likely, SMP purchases would simply be used to limit market turbulence while a traditional bailout package was negotiated.
If a Spanish EU/IMF bailout package covered the government’s gross funding needs through the end of 2014, and included €75bn for bank recapitalisation, then it would amount to around €350bn. A traditional package would keep the burden of adjustment squarely on the shoulders of the Spanish taxpayer. Spain could be accommodated in the liquidity hospital as currently designed, but a Spanish admission would force the region to think hard about both the size of the fiscally based liquidity hospital and its funding. It would push the region closer to a hybrid liquidity hospital, where governments provide capital and the ECB provides funding.