The €100bn rescue package agreed for Spanish banks over the weekend is credible and, to that extent, should be welcomed. But it is not enough, by itself, to stabilize markets on a sustained basis.
A couple of weeks ago we wrote that a credible recapitalization of the Spanish banks was a necessary, but not sufficient, condition to restore stability to sovereign-debt markets in the euro area. Euro-area finance ministers have now agreed to lend Spain up to €100bn to recapitalize its banking system. The money will be channeled via the FROB (Fund for Orderly Bank Restructuring) and the conditionality attached to the loans will apply only to the Spanish financial sector (i.e. no additional austerity or structural reforms). According to press reports, the loans will carry an interest rate of about 3%.
Short of a direct recapitalization of the Spanish banks (which was never really on the cards), this is about the best deal the government could have hoped for. Moreover, there are some encouraging aspects of the package—it is pre-emptive, there is no additional fiscal conditionality, the size of the loan is at the upper end of expectations and the interest rate is hardly penal. Policymakers may be learning from their past mistakes.
There are two ways of looking at the bank-recapitalization plan: as the first step towards a full European Union/International Monetary Fund bailout; or as a long-overdue attempt to deal with Spain’s banking overhang. In our view, euro-area leaders deserve credit for the latter. Sooner or later, though, attention will switch back to the broader issue of public-sector/external debt sustainability and much work remains to be done in that area.
Attention will now switch to next Sunday’s Greek election. Recent opinion polls have pointed to a narrow victory for the centre-right New Democracy party and to the formation of a pro-bailout government. But the result is too close to call. If we do get a pro-bailout government then, together with the Spanish bank-recapitalization plan, we may, for a while at least, enter a less volatile period in the sovereign-debt crisis. But we cannot ignore the alternative scenario, which would quickly puncture any new-found optimism.
Beyond the Greek election, the next important event will be the EU summit on June 28 and 29, at which policymakers will discuss a blueprint for greater economic/fiscal integration which may include a roadmap towards some form of joint-bond issuance/debt-mutualization. In recent months, it has become clear that euro-area leaders are adopting a more flexible approach to the sovereign-debt crisis and that the crisis itself is acting as an important catalyst for change—i.e. pressure for deeper fiscal integration and, more recently, some form of banking union. Unfortunately, the items that might help stabilize markets on a sustained basis, such as Eurobonds, direct bank recapitalizations or joint deposit guarantees, are probably not yet on the near-term agenda.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.