Relief in Spain, disappointment in Greece, Ireland and Portugal. And I’m not talking about the football.
Spain has got its hand on a cool €100bn of European money. The markets are happy (for several hours at least). Prime Minister Mariano Rajoy has called it both a ‘triumph’ and a ‘victory’ (a few more victories like this and they could be in real trouble).
Congratulations all round to those who have solved the Euro crisis. Take 4.
Far be it for me to rain on anyone’s parade here, but there seem to me to be two pretty substantial problems: First, Spain is being treated much more leniently that Ireland, Portugal and especially Greece, which might not matter so much were the Greeks not about to hold a pretty important general election in 6 days time. Second, this loan will help Spain’s banks, but may actually end up making the country’s debt crisis worse. More on that in a moment.
If anyone has a right to cry ‘unfair’ about the Spanish deal, it is surely Ireland.
The Spanish and Irish problems are very similar: neither Government borrowed excessively (certainly nothing like the UK) but both had spectacular property booms fuelled by cheap Euros that, in the bust that followed, wrecked their banking system. Both have required huge amounts of European money to prevent a complete banking collapse. But the Irish bailout was roughly 50% more expensive and came with strict conditions and strict supervision; the Spanish have been allowed to borrow money at just 3% and have had very few conditions attached. The Irish this morning are wondering, why?
The Greeks, on the other hand, aren’t just wondering, they are learning the lessons. Seen from Athens, Madrid was playing a giant game of chicken with the rest of the Eurozone: ‘We’re too big to fail and we can bring down the whole single currency. Try and get tough with us and we’ll see who has the most to lose’.
Well this is exactly the platform on which Alexis Tsipras and his Syriza party have been fighting this election campaign. Their message to Greek voters is: "Our economy is already wrecked, but the Germans know we can wreck everyone else’s too, so as long as we’re tough enough they’ll renegotiate’.
Everyone kept telling the Greeks this was unrealistic, but the Spanish experience makes Tsipras’s analysis a lot more convincing.
Upsetting Greece, Portugal and Ireland may be a price worth paying if it was going to solve the Spanish crisis, but adding an extra €100bn to the Spanish Government’s debts may actually make things worse. The money has been lent to the Spanish Government, not to Spanish banks, and must be repaid by the Madrid treasury.
The problem is that this money, coming from the Eurozone rescue fund, has what is called ‘seniority’ over other debts. Which means that if there’s even a danger Spain won’t be able to repay all its borrowings, this €100bn will have to be repaid first and in full before anyone else gets a Euro.
Now if you are thinking of lending money to the Spanish Government by buying one of its bonds, you biggest worry in recent months has been that you won’t get all your money back, what they call the ‘default risk’.
That’s why lenders to Spain have been asking for more and more interest (yield) on their loans, to compensate for that risk.
This morning, if you are tempted to buy a Spanish bond, you know that you have just been bumped down the queue in terms of who gets repaid first. Your default risk has gone up, and that’s going to do nothing to help Spain borrow the money it needs at affordable rates.
So a weekend that has increased the risk of the Greeks defying Europe, has upset the Irish and the Portuguese, and may make it even more expensive for the Madrid to raise money on the international markets.
A triumph indeed.