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Little hope

July 21, 2012

Spain's banks are to receive 100 billion euros from the EU. DW's Bernd Riegert warns that this will be another step toward joint liability - even though Berlin insists that it isn't.


The Spanish state was no longer able to help the country's ailing banks. To be sure, Madrid long tried to cover up the fact. But with the eurozone group's recent decision to finally bail out Spanish banks, Spain is now fully dependent on the rescue fund set up by solvent euro countries.

No flowery rhetoric can cloak the fact. Indeed, Spain's own banking rescue fund will be the first recipient of EU money. If the money is not paid back, Spain itself will be liable for the banks, whose wrong-headed speculations racked up so much debt in recent years.

This means the 100 billion euros promised to Spanish banks will end up increasing Spain's own debt. And more debt will lower the country's credit worthiness. Financial markets have already reacted to the agreement. Spain's interest rate for borrowing money is dangerously high. In the long term, Spain will not be able to sustain such a high rate. The bottom line: the banks may have been saved, but the pressure on Madrid is still on.

Lots of money, weak conditions

For the eurozone, the bailout means that liability is already being spread around. But that comes without the eurzone gaining direct control over Spanish banks' future conduct. In return for those huge sums, Madrid merely promised to keep a close eye on the banks and embark on restructuring reforms.

That's a new measure. So far, funds for Greece, Portugal and Ireland were only doled out with tough conditions attached. Spain, however, will be getting its 100 billion euros under milder terms. Other struggling countries will think they can also ask for light conditions in the future. Ireland is already doing so, while Greece is demanding that Brussels loosen its tight grip.

Bailing out banks involves a lot of risks. It is unclear exactly how much money banks will need. That will only be known by September. It also remains to be seen how much risk bad Spanish real estate loans will turn out to have.

A Spanish court has just ruled that private investors are entitled to compensation for their now worthless shares of struggling banks. If the ruling prevails, the EU rescue fund will end up compensating private creditors. European tax payers would thus be liable for Spanish investors. The currency union would quickly turn into a union of joint liability. According to the German government, that is exactly what should not happen.

Riegert, Bernd
DW's Bernd Riegert says the steps toward joint liability are already underwayImage: DW

Recovery hopes might be ill-founded

The next steps on the path to joint liability have already begun. If the permanent rescue fund known as the European Stability Mechanism is successfully launched in September, joint liability will be the rule, with no exceptions. The ESM is tied to common banking supervision across the eurozone, but once that's in place, bailing out banks could become a pan-European norm.

The ESM is also supposed to be able to directly buy bonds from heavily indebted states. This will open the floodgates for collectivizing debt. German central bank president Jens Weimann has warned of just that.

The German government is still claiming there's hope things won't get that far. Finance Minister Wolfgang Schäuble is looking to a union of hope to cover up the union of joint liability. But the last two years have shown that rescue efforts just don't work. Including Spain and Cyprus, there are now five countries on the brink. Italy and Slovenia might soon join them. Against all hopes, bailout measures have failed to contain fiscal contagion. Without collective liability - which will be very costly for taxpayers in countries like Germany - the debt crisis most likely won't be fixed.

Of course, one shouldn't ditch the hope that just maybe, against all odds, the EU finance minister will swoop in and win the day after all.

Author: Bernd Riegert / ai
Editor: Shant Shahrigian

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