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Spain is going to need to take a bailout because rising interest rates are going to lead to a downturn in the country’s financial sector, according to the Financial Times’ Wolfgang Münchau.Münchau argues that the ECB recent rate hike, coupled with the expectation it will hike further in the future, is going to raise the interest payments on mortgages in Spain. And while that sector is already troubled, it will be placed under further pressure which will deepen its capital crisis and leave it calling for aid.
Thus far, the only example of a banking crisis leading to a sovereign crisis we’ve seen in the eurozone is Ireland. There, the government chose to step in and bailout its banks. When the costs became unsustainable, it sought help from the European Union and IMF. EU leadership have refused Ireland’s push to force haircuts on bondholders, many of which are European banks.
Spain is a somewhat different case. Its real estate sector has been slower to adjust, and its banking sector has seen government intervention through forced tie ups and limited cash injections, rather than a full on bailout.
It is possible Spain could seek aid from the EU-IMF European Financial Stability Fund before its government bails out its banking sector full stop. This may prevent the state from taking a bailout, and may preserve its lending rate at somewhat more agreeable terms than Greece, Ireland, or Portugal now have.
The question is whether or not Germany and France would agree to such a deal. It’s likely their number one concern is preserving the stability of their banking systems, so if organising a banking sector bailout of Spain, rather than a sovereign bailout, reduces their costs they are likely to go for it.
While we may see a “bailout” in Spain, it could be a whole different animal compared to Portugal, Ireland, and Greece. When French Finance Minister Christine Lagarde says, “Spain isn’t a problem,” she may mean Spain, and not its banks.