Spain sent shivers through the markets this week by admitting that its borrowing costs had become prohibitive, and that it would need help recapitalising its banks. Their mounting losses amid renewed recession and a bursting housing bubble threaten to overwhelm state coffers.
The European Central Bank said it would continue to supply banks with liquidity when they need it, but did not announce another huge round of cheap three-year loans as some had expected. A gauge of service sector activity across the eurozone fell to a three-year low last month.
What the commentators said
Bolstering banks’ liquidity merely buys time; it doesn’t address the basic problem of insolvency. It is “akin to giving a patient with two broken legs” some morphine, said Fxpro.com. As for a plan to recapitalise Spain’s bust banks, this may not arrive quickly.
Spain wants Germany to allow banks to get funding directly from the European rescue fund because it wants to avoid the harsh conditions that apply to official bail-outs for indebted states. Germany is opposed, as it thinks putting money straight into banks provides less scope for extracting policy reforms from bankrupt governments.
But giving Spain’s banks capital would be much cheaper for Europe than an official bail-out of the government, especially as there are fears that shoring up Spain is likely to overwhelm the rescue fund. In the meantime, with capital leaking out of the country, and its banks in grim shape, a bank run in Spain “is all too plausible”, said The Economist, especially if Greece is forced out of the euro. Worries that Spain could follow would prompt people to grab their euros before they turn back into devalued pesetas.
Leaders are beginning to realise that the basic choice is “further integration or break-up”, said Jens Nordvig of Nomura. So there has been talk of a banking union, with deposits guaranteed at the European level to forestall a bank run on the periphery. But with Germany so far resisting any moves that will create new liabilities for its taxpayers, “it doesn’t look like [leaders] have a quick fix to hand”, as Commerzbank’s Rainer Guntermann charitably put it.
The worry is that if Germany has held out so far, “it is unlikely to relent anytime soon”, said Fxpro.com, despite the turbulence it will endure if the eurozone breaks up. The eurozone is facing a “messy” and potentially calamitous “divorce”.