Spanish bailout bombs

 
Tim Wallace
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N’S bank bailout comprehensively failed to gain market support yesterday, as investors realised the deal had done little to solve the underlying problems facing the Eurozone’s inefficient economies.

Prime Minister Mariano Rajoy claimed on Sunday the €100bn (£80.6bn) plan to recapitalise his country’s devastated banks had “resolved” much of the cause of the crisis.

But economists warned that a Eurozone breakup remains a very real possibility, and after a brief spell of relief yesterday morning, Spanish and Italian government borrowing costs jumped sharply.

Stocks also rapidly lost early gains, with almost every major market ending the day below Friday’s closing level.

The depth of the crisis was underlined further when Fitch downgraded leading Spanish banks Santander and BBVA last night, cutting their credit ratings from A to BBB+ following the state’s downgrade to BBB last week.

And the international impact of the country’s weakness was brought home as the British arm of Santander was cut from A+ to A.

The bailout will see up to €100bn in bonds loaned from the European Financial Stability Facility (EFSF) to the Spanish government, which will in turn give it to weak banks.

This transfers banks’ bad debt to taxpayers, adding to the already indebted government’s burden.

But this is not the worst-case scenario. Analysts had feared the bonds would come from the permanent European Stability Mechanism (ESM), which only offers loans that are senior to other debt. This could have scared off private investors even more.

Nonetheless, there are still risks facing the plan. The EFSF is guaranteed by Eurozone governments, and Finland says it will only consent to the bailout if it receives collateral from Spain and if the government promises to reform the banks.

“Although the bailout will certainly help the Spanish banking system, the fundamental situation in Spain is the same as it was a week ago,” said economist Graeme Leach from the Institute of Directors.

“We [saw] a predictable short-term rally, but the future of the euro remains in serious doubt. The domestic political situation in Greece and Spain is still likely to result in some form of Eurozone breakup.”

Spain’s 10-year borrowing costs rose 29.2 basis points (bps) to 6.508 per cent yesterday, while Italy’s jumped 26 bps to 6.032 per cent.

Italy’s stock market dropped 2.79 per cent, while Spain’s Ibex slid 0.54 per cent and the FTSE 100 fell 0.05 per cent after a strong start.