8 Holes in the Spanish Bailout

In an emergency conference during the weekend, the EU decided on granting Spain up to 100 billion euros for its banks. 

After long weeks of uncertainty, this move will definitely cheer up markets. However, looking at the details or the lack of them, shows that the gloom could return within days. Here are 8 holes in the Spanish bailout decision.

1. Final sum unknown: The statement regarding the Spanish bailout stated the round number of €100 billion, but the final sum depends on the a final assessment due only around June 21st. This is higher than the early estimates of 50-80 billion. So, is the higher sum supposed to make us feel more confident? Has the EU put a buffer that is big enough? Not exactly. Other estimates for Spain’s aid needs range between 200 to 450 billion euros. This could be only the beginning.
2. No IMF funds: The International Monetary Fund will only provide technical help, but no real money. So, countries such as the US, Japan, Canada and others refuse to provide real help. This shows the distrust in Europe and its solution.
3. Where will the money come from?: The statement talks about funds coming from the EFSF (temporary bailout fund) or the ESDM (permanent). The money isn’t really available. It will either have to be raised on the markets or paid directly by member states, including Germany, and excluding Spain of course. Raising money when the IMF isn’t participating will not be easy, and taxpayers will not be happy to aid banks.
4. Clear move to calm region before Greek elections: The move comes before markets open in the last week before the critical Greek elections. The timing and the lack of exact details also shows that this is a hasty move intended to calm markets, with no real substance behind it.
5. Backlash in Spain: Spaniards are already frustrated with an unemployment rate of 24%, new austerity measures, and quite a few other problems. The lightness in which the government decided on injecting money into Bankia and the lightness in which the government changed its stance on external aid will not be well accepted in Spain, and mass protests and strikes could “welcome” the deal.
6. Finnish demand for collateral: The northern euro-zone member insisted on receiving collateral from Greece, and they immediately demanded collateral from Spain in case they pay. This is yet another unaddressed hurdle.
7. Backlash in Ireland regarding banking solution: According to the statement, Spain will not be required to perform new austerity measures, and the bailout will focus on the banking sector. As the Irish already stated long ago, a solution for Spanish banks that is different from the painful solution that Ireland got because of its banks will trigger a renegotiation of the Irish terms. Irish citizens pay a dear price of austerity for their “bailout” which is clearly a bailout of their banks that owe money to German, French and British banks. Why is Spain exempt from this?
8. Backlash in Greece over austerity: The move may calm markets before the Greek elections, but will also impact their results. SYRIZA is campaigning for the cancellation of the bailout (or memorandum if you wish), which is clearly causing a collapse of Greece. One of the things that SYRIZA’s leader Alexis Tsipras said, is that they want Greece to be treated as an equal member in Europe. The Spanish deal, with no strains attached, shows that Greece is discriminated against. In addition, it clearly shows once again that bailouts are for banks, not for the people. The Spanish “solution” will certainly help SYRIZA’s campaign. A victory for SYRIZA will accelerate a Greek exit from the euro-zone, with all the contagious consequences.

The euro will likely cheer the move, especially as there are many EUR/USD shorts to cover. But this short covering will probably be short lived, as markets digest these holes (and probably more ones).