Spain: a bailout but no ‘bail in’

So Spain is to join Greece, Ireland and Portugal in an EU/IMF bailout package.  The Spanish government is only asking for funds to recapitalise its banks, which have huge ‘bad debts’ after the collapse of the Spanish property bubble.  The Conservative government is desperate to avoid a ‘full’ Troika package to fund its government debt because that would mean even more draconian fiscal measures to cut government spending dictated by the EU Commission, the ECB and the IMF.  So only £100bn is being asked for instead of €350bn that would be needed for a full bailout.

But the government won’t escape the consequences.  The bailout constitutes nearly 10% of Spain’s GDP and will be added to the sovereign debt level, taking it to nearly 100% of GDP.  At that level, it will be extremely difficult to stop the debt becoming out of control, or ‘sustainable’.  Research from many sources (Reinhart and Rogoff, McKinsey, the BIS) shows that when public debt goes over 90% of GDP, it usually leads to economic recession.

As it is, Spain is already in a deep recession, with GDP expected to fall by around 2% this year and further in 2013.  So there is no way that the Spanish government can meet its fiscal targets, already set by the EU Commission, to get the budget deficit down to 3% of GDP in 2013 from 8.5% in 2011.  That’s the biggest fiscal tightening in the history of Spain and it can’t be done anyway.  Indeed, the EU Commission itself reckons Spain’s budget deficit will still be around 6% of GDP next year.  Fiscal austerity in Spain is already failing and now the government is taking on even more debt.

What’s really galling is that the Spanish people must take on the full burden of recapitalising their banks.  Just as in Ireland, where the taxpayers now have a burden of 25% of GDP over the next 15 years to repay the loans incurred to restructure their banks, Spanish people must now do similar.  The banks’ bond holders (who are other banks, pension funds, insurance companies and hedge funds) are going to be repaid in full.  Even though they took a ‘financial risk’ when they bought the bonds of the banks, the bondholders will lose nothing because the government will take on the full burden.

There may be a bank bailout but there is no ‘bail in’ of the bondholders.  Instead of the government nationalising the banks, sacking the failed old senior executives and reducing the costs by refusing to pay the bondholders and shareholders, the Spanish people must leave the banks in private ownership and pay all the bills.

The cruel irony is that Spain will probably forced into a full Troika package anyway later this year because Spain’s economy is so weak and unemployment is so high that the government cannot meet its fiscal targets and bond markets will demand higher and higher rates of interest to lend money to the government.

So it’s handouts for the bankers and their backers and austerity and cuts for the rest of Spain.

5 Responses to “Spain: a bailout but no ‘bail in’”

  1. lainej Says:

    “when public debt goes over 90% of GDP, it usually leads to economic recession”.

    Can you elaborate on this a little bit..?

    • michael roberts Says:

      There are number of studies that argue, as debt levels (both private and public) reach the size of country’s GDP, they threaten a banking crisis and could also use up capital in funding the debt rather than expanding productive sectors and thus lower the overall growth rate. See Reinhart and Rogoff, This time is different April 2008 and Growth in the time of debt, January 2010; the McKinsey report on deleveraging 2012; and the BIS working paper The future of public debt, February 2010. This argument is disputed by the likes of Paul Krugman who argue that the causality is the other way round: namely that low growth and recession leads to high debt not vice versa. Thus the answer for him is get higher growth and debt will fall automatically. I think the causality should be that lower profitability leads to lower growth and/or recession which forces businesses and governments to borrow more, thus driving up debt to stave off recession. When recession comes, clearing that debt makes it even more difficult to restore profitability and growth quickly or not at all. Thus we are in a long depression.

  2. Kieran Says:

    The problem with euro is that countries like Germany have been running current account surpluses since 2001. So the Euro should rise in Germany (revaluation). These surpluses have ended in German banks and have been lent to banks in Spain. So the property bubble. Spains euro should have been devalued as they were running a current account deficit.

    • michael roberts Says:


      I agree. It is one of the features of trying to integrate different national capitals into one. In a central capitalist state, the deficit country (region) is funded by fiscal and monetary transfers from the centre. So Donegal gets funds from Dublin or Wales from London, the place they run a deficit with. This is accepted as a price for ‘national unity’ and also for the larger national capital it creates for the capitalist sector to make money in. The purpose of a capitalist Europe is a bigger market and more labour to exploit. But the EU and Eurozone are not fully integrated fiscally, monetarily or for capital and labour. So a great capitalist slump starts to break it up.

  3. Edgar Says:

    There is no break up going on but greater integration. They speak of a bank union now. Every time a European population votes against the EU they just have another election and then another until they get the result they want, funnily enough when they get the desired result the elections stop! Welcome to the joke that is democracy this side of the pond.

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