Photo: Flickr Chris Griffith
Despite the fact that investors got much of what they had wanted in a Spanish bank bailout over the weekend, they have been betting strongly against Spain and now Italy in the wake of the bailout announcement.Lombard Street Research’s Charles Dumas provides the best summary we’ve seen so far of why many believe that the bailout is a failing proposition:
The Spanish bail-out was a typical example of half-measures. It seemed clever to insulate Spain a week ahead of the Greek elections, so that “Grexit” could be possible without immediate major contagion into Spain. But Spanish banks needed equity, not debt funding that would leave them as insolvent as before. So the provision of debt funding by the Eurozone required the Spanish government as intermediary, to turn the debt – now effectively national debt – into equity for its banks. So private holders of Spanish government debt have effectively been subordinated – and will be for each further tranche of aid that is needed in future. Thus contagion was worsened, and quickly spread to Italy, which can only too clearly not afford its share of the Spanish bail-out. Additionally, the Greek Socialists’ claim that Europe will willingly renegotiate Greece’s austerity programme was reinforced by the sight of the Eurozone blinking before Spain’s tough negotiating position.
ANOTHER PERSPECTIVE: 6 Reasons Why Spain’s Bank Bailout Plan Is Awesome >