European Union

Markets Not Reassured By Spanish Bank Bailout


IBEX 35 this morning

European Finance ministers have approved a plan to give Spain 100 billion euros in an attempt to recapitalize Spanish banks. The move is an attempt to avoid a bailout of the Spanish government. The bailout of Spanish banks was praised by Christine Lagarde, Managing Director of the International Monetary Fund:

The implementation of these measures will contribute to significantly strengthen Spain's financial system, an essential step in restoring growth and prosperity in the country.

The IMF was in the news today after an unsympathetic letter from Peter Doyle, a senior economist at the organization, ended up finding its way to CNN. The letter criticizes past and present Managing Directors and outlines the incompetence of an organization that many are hoping will help Europe recover from the euro-crisis. Doyle explains in the letter that he is, "ashamed to have had any association with the Fund at all".

Spain's IBEX 35 has not responded well to the bailout announcement taking a hit of over five percent.

Over at Business Insider Simone Foxman explains why the attempt at recapitalization has failed to reassure investors:

One of the most concerning pieces of that bailout plan is the fact that Spain—and not a collective of EU countries and organizations—will be liable for the loans made by Europe's bailout funds to Spanish banks as part of this program.

Investors had hoped that the bailout would act to separate stress on the Spanish government from stress on its troubled banks, as Spain has a manageable public debt burden at 68.5 percent of GDP at the end of 2011.

While the new loan won't officially factor into Spain's debt-to-GDP ratio and it has very flexible terms, the fact that EU leaders are adding to the stress on a troubled country rather than absorbing the stress as a collective whole signals that there has been little change in EU leaders' crisis ideology.

The fact Spain is alone with this bailout and will not be able to rely on countries like Germany for shared liability is understandably worrying to investors, as is the announcement from the Spanish government that Spain will not see economic growth until at least 2014.

Even were the bailout of Spanish banks to work confidence in Spanish banks has collapsed and would be unlikely to recover to previous levels. A Gallup poll released today indicates that only 19 percent of Spanish adults has faith in Spanish financial institutions or banks, down from 53 percent in 2005.

To sum up: an institutionally incompetent organization is praising a bailout of distrusted banks that has failed to reassure the markets in a country where youth unemployment is over 50 percent, protests against 'austerity' continue, and we might see growth in 2014.