June 10, 2012 7:24 pm

Spain’s bailout

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The real steps to recovery have yet to be taken

The political fan-fluttering, handclapping and finger-snapping that marked Spain’s path towards a rescue package would have made flamenco dancers proud. But, as the weekend’s crescendo passes, important questions remain. Will the proposed measures be adequate to recapitalise Spain’s banking sector – and is the country’s bailout dance really over?

The slow build-up to Spain’s banking crisis means numerous analyses are on offer. Multiplicity, though, does not bring unanimity. The International Monetary Fund thinks domestic bank capital buffers could be brought up to the new Basel III standards for an aggregate €40bn (mainly by bolstering second-tier banks). The promised assistance of up to €100bn would then provide a generous margin. But rating agency Fitch puts the requirement at €50bn-€60bn – or, if Ireland’s pattern of property-related losses repeats itself, €90bn-€100bn. Some private sector forecasts are even more pessimistic: Barclays Capital estimates a basic €70bn-€80bn, rising to €126bn in an extreme stress scenario.

All of which underscores how interrelated bank sector losses are with Spain’s broader economic malaise. Property-related loans were 37 per cent of gross domestic output at the end of 2011: corporate debt was 186 per cent, the highest in the eurozone, aside from Ireland. Yet the economy is likely to contract by 2 per cent this year; unemployment is 24 per cent and rising; and perhaps 1m residential units overhang the property market. Vulnerabilities are obvious. Better news, short term, is that Spain’s future net debt issuance needs should now be very modest in 2012 – no small comfort given uncertainties surrounding Greece’s election rerun. But while European leaders may have improved on bailout choreography the fourth time around, the real steps needed – commitment to the eurozone’s periphery and more focus on growth – are unchanged

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