Spain :The bailout Costs of the big elephant.
Spanish bonds extended declines after the Financial Times Deutschland reported that the European Central Bank and a majority of euro-region states are calling on Portugal to tap the rescue fund to prevent Spain from also having to seek help. That followed comments from Bundesbank President Axel Weber late on Nov. 24 that if the 750 billion-euro rescue fund isn’t enough to reassure markets, “it will have to be increased.”
Steven Major, global head of fixed-income research at HSBC Holdings Plc in London, said in a Nov. 8 report that the fund, financed by the EU and International Monetary Fund, may not be sufficient.
In practice, the EU may only be able to deploy 367 billion euros of its 440 billion-euro share of the European Financial Stability Facility, he says. That’s because the EFSF will raise the money for the bailouts by issuing bonds and must set aside a cash pile to secure a AAA credit rating, Major said. A three- year bailout of Portugal would require 51.5 billion euros and Spain would need 351 billion euros, HSBC said.
“The big elephant in the room is Spain, which is too big to fail and too big to be bailed out,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said in an interview Nov. 23. “In some sense though, Spain is in a better place.”
Too Big to Bail?
Asked whether its size would deter an EU bailout, Bank of Spain chief economist Jose Luis Malo de Molina said late yesterday that “the systemic importance” of a country like Spain “reinforces the incentives and stimuli for the rest of the countries to be ready to help in the case that it were necessary.” He said market tensions can become a “self- fulfilling prophecy.”
The Spanish government, which has repeatedly ruled out external help, doesn’t face the first of its 45 billion euros in bond redemptions next year until April. It has two more bond auctions scheduled for December, and Deputy Finance Minister Jose Manuel Campa said in an interview Nov. 24 that spending cuts and higher-than-forecast revenue make the government’s funding “quite comfortable.”
Campa says there’s no need for additional measures to stem contagion and instead Spain must show its commitment to implementing the budget cuts and structural changes already announced to reduce the deficit to 6 percent of GDP next year from 11 percent in 2009. The target is “unconditional,” he said.