From Citi’s Willem Buiter…
- After Spain’s still-to-be-finalised euro area bank bail-out, we expect it to be in a troika programme with sovereign conditionality, quite possibly soon.
- After Spain’s bank bail-out, Cyprus or Italy will be the next euro area countries to apply for a troika bail-out, in our viewWe believe the need for a sovereign bail-out for Spain and Italy will be driven by a lack of affordable access to market funding and a lack of credibility of the respective sovereigns’ commitments to engage in sufficient fiscal and structural reform.
- These sovereign bail-outs are highly likely to involve fiscal and structural reform conditionality for the sovereign. They are also likely to aim to retain partial market access for Italy and Spain, relying on a mix of ECB-subsidised funding and financial repression to ensure take-up of the residual government funding needs by domestic banks and other financial institutions.
- Spain or Italy may be able to access one of the precautionary EFSF/ESM programmes, but those programmes would still likely come with sovereign conditionality. Primary or secondary market purchases by EFSF/ESM could be part of either a precautionary or a normal EFSF/ESM programme. Any programme would require a request from Spain or Italy and unanimous non-objection by the Eurogroup.
He goes onto argue that just parial programs will show how the current bailout funds are too small and will need expanding of both monetary firepower and abilities.