Blog Post

The agreement on Spain’s bank – problem solved?

The Eurogroup has finally agreed to do what commentators and economists, including myself, have been asking for for months: a deal to use EFSF/ESM money to help restructure the Spanish banking system. So is this a good agreement? Of course, international commentators were quick to argue that it is all in vain and does not […]

By: Date: June 10, 2012 Topic: European Macroeconomics & Governance

The Eurogroup has finally agreed to do what commentators and economists, including myself, have been asking for for months: a deal to use EFSF/ESM money to help restructure the Spanish banking system. So is this a good agreement? Of course, international commentators were quick to argue that it is all in vain and does not meet the necessary elements to be considered a sensible solution to the crisis or a stepping stone towards a banking union. I disagree. Here is why:

  1. A common argument is that the deal would increase Spanish debt by 10% of GDP thereby making it more difficult for Spain’s government to keep market access. This is very unclear, however. In fact, the current market price for Spanish debt incorporates already the implicit liability resulting from the over-indebted banking system. In fact, there is abundant research (e.g. here) showing that liabilities in the banking system imply higher yields for sovereign bonds. By making these implicit liabilities explicit, the price of Spanish debt should not change overall. Moreover, by providing the loan at a very preferential interest rate, the actual burden is actually going down. While the face value of debt increases, debt sustainability may actually improve.
  2. A sophisticated variant of the argument worries that by giving a loan to the Spanish FROB with preferential creditor status, all other debt will become much more expensive as private creditors will be treated junior. This argument appears to be pretty overstated. In fact, the official loan is very small compared to the outstanding debt. Even if it was to be treated senior to the outstanding debt, this hardly changes the equation.
  3. The details of the restructuring of the Spanish banking system are the most crucial determinant of the actual liability to the Spanish tax-payer. In fact, if the Spanish FROB injects capital into Spanish banks, it also acquires a significant equity share in those banks and therefore acquires an asset. In the US, government-led bank rescues typically did not result in a loss to the government but rather in a profit. If the Spanish government were to act in the same way, then the increased debt level would be off-set by an increase in valuable assets. Of course, if Spain was to follow the Irish example, things would look worse.
  4. Saturday’s deal leaves a key question unanswered. Who will bear the losses accumulated in the Spanish banking system? Ideally, one would like to minimize the cost to the tax payer and impose losses on the shareholders, junior debt holders and maybe also senior bond holders of Spanish banks. If done well, the Spanish government could then even make a profit.
  5. Who should do the restructuring? Many have argued that this should be done exclusively by an international resolution authority and that the agreement again fails on that front. I would argue that the current solution gets as close as possible to that solution. In fact, the EU does not have the authority to do bank resolution and it would take years until the necessary legal and practical challenges were to be overcome. Banks located in Spain fall under Spanish law and jurisdiction and that cannot be easily changed. The current programme nevertheless addresses this by de facto moving control of banks and the financial system to the Commission (in liaison with EBA, ECB and IMF). In fact, it is clearly stated that the Commission will exercise strong conditionality on policy actions taken on banks. So in reality the European Commission has become the resolution authority even though the Spanish government may still be able not to follow Commission’s conditionality.

The key to a successful resolution of the Spanish crisis is now that the Commission submits all the Spanish banks to a very rigorous test and then restructures the Spanish banks with minimal costs to the Spanish tax payer. By providing outside finance at preferential rates, the deal will reduce the interest rate pressure on outstanding Spanish government debt. Undoubtedly, Spain faces a very severe external debt problem. The best way to reduce that debt problem is by imposing losses on international and local creditors to Spanish banks. If this does not happen soon, Spanish government debt may indeed become unsustainable. It is now time for the Commission together with the Spanish government to do the right thing.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts