More on Spain's bailout

Spain’s decision to apply for eurozone assistance to recapitalise its banking system removes one of the key structural weaknesses which has undermined confidence in the euro for many months. Until now, successive Spanish governments have repeatedly claimed that there was no need for eurozone assistance for their banking sector. However, these claims have not carried much credibility since the economy dropped back into recession last year, taking the real estate sector down with it. (See earlier blogs here and here.) The failure of Bankia was the final moment of truth.
Since then, it has been apparent that Spain would face a large bill to recapitalise its banks, but it has not been clear exactly how large the bill might be, or where the money would come from. This uncertainty has worried both domestic deposit holders in Spanish banks, and providers of liquidity to the banking sector. It has been one of the two proximate causes of the recent worsening in the euro crisis (the other, of course, being the Greek elections).
This weekend’s bail-out removes much of the uncertainty both about the overall cost of the bank rescue, and about the source of its funding. It is therefore a large step forward. However, it does not solve Spain’s other structural problem, which is how to stabilise its government debt ratio. If anything, it makes that problem worse, and places an increased focus on the European summit on 28/29 June to address the issue.

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