Prime Minister Mariano Rajoy argued at this week’s G20 summit that the capital contributed by the EU through the European Financial Stability Fund for bank recapitalizations should not be counted as debt, and thus not impair the solvency of the country that receives it. In the Spanish case, this would amount to dissociating the bank crisis from the sovereign debt crisis, enabling the European fund to inject capital directly into the affected banks, without the Spanish Treasury being affected by the consequences of a greater public debt load.
This is reasonable, because it would avoid the higher financial costs produced by the inflated risk premium associated with increased public debt; and it also enjoys the backing of EU politicians and officials, such as French President François Hollande and the EU commissioner Joaquín Almunia. The dissociation between bank risk and sovereign risk would be effective in alleviating the pressure of the markets. The proposal, however, faces huge legal and political difficulties.
At the present time EU norms prevent the direct injection of capital into banks from the rescue fund. Only the political will of all the countries in the Union would allow direct injection of capital to be included in the statutes of the Stability Mechanism. But it is far from clear that this political will exists, and to reach agreement on the matter may take time that the Spanish banking system does not have. Because, as the G20 has demanded of the Spanish prime minister, Madrid must rapidly set in motion a clear and forceful bailout program. The Spanish banking crisis compromises the stability of the euro zone and, in turn, European weakness jeopardizes the global economy.
Though the dissociation of bank risk and sovereign may be the optimum solution for Spain and for any bank bailout, in the present circumstances it may be asked whether the most sensible political option is to accept negotiations with Brussels that would extend the due date for return of the capital contributed by the EU, and reduce the financial cost of the bailout. The proposal publicly advanced by Rajoy would make sense, had it been previously negotiated with Germany and Brussels; but this does not seem to be the case going by the chancellor’s remarks and the warnings voiced by EU officials about the existing law.
To conclude, the government should promptly confirm the bailout request, once the recapitalization estimates of auditors Roland Berger and Oliver Wyman are known, and begin negotiations to define in detail how much money it will request; what will be the due date for return, the rate of interest, and the precedence of the new debt over such Spanish assets as may be acquired by private purchasers. The G20 has endorsed the Spanish bank bailout, and supports growth policies. This is not bad news for the government.