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Spain: Not Really a Bailout…and Not Really Helping

The debt crisis in the euro zone is three years old. It’s still feeding on itself. And euro zone officials are still running behind it.

And now, Spain has become the fourth euro zone country to reach out for a bailout (following Greece, Portugal and Ireland)…but don’t call it a ‘bailout’. It’s really just a friendly loan, according to Spain’s economy minister: “In no way is this a rescue. It’s a loan with very favorable conditions”.

Call it what you will, it is really further proof that euro zone officials can’t quite catch up to the crisis. Even worse, the $125 billion not-really-a-bailout might end up hurting Spain just as much as it ‘helps’.

It might hurt because the money isn’t really for Spain, it’s meant to shore up Spanish banks. But in order to recapitalize the banks, the burden is put on the shoulders of the Spanish government by adding to its already expanding debt load.

The funds will be funneled through Spain’s state-backed bail-out fund, the Fund for Orderly Bank Restructuring (FROB). Meaning the money will go first to the Spanish government before it goes to Spanish banks. That means Spain is on the line since the money will count against the country as sovereign debt. The $125 billion will add something like 10% to the country’s debt-to-GDP ratio (the ratio of government debt to economic growth), which is already over 68% now, and expected to reach 80% by the end of the year.

And this is not a good time for Spain’s government to be borrowing a lot of money, since it is already having a hard time selling bonds. And after the not-a-bailout agreement was reached, the bond market pushed the country’s borrowing costs to a euro area record high, telling us that the country looks too risky. The 10-year yield passed 7%…that is not a long-term sustainable level.

The fact that the country faces prohibitive costs to sell bonds isn’t the only problem. The not-a-bailout doesn’t do anything to address some of the core problems: Spain’s economy is contracting and its unemployment rate is over 24% (the highest in the euro zone).

This non-bailout is no silver bullet. And it only took a couple of days for it to backfire and make things harder on Spain instead of making things easier. It took the problems from the banking system and transferred them to the government’s balance sheet…leaving the government and banks to prop each other up. It amounts to another temporary stop gap, not a real solution.


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