A European summit scheduled for October 23 will address a proposal for recapitalizing the banking system and could consider a forgiveness of 20% of Spain's national debt and required lenders to bolster main capital reserves with 9% in reserves. Even if the changes are only applied to our principal lenders, forcing them to find 40 billion euros, such a decision would bring disaster to Spain.
If applied, lenders would have to beg for funds from closed markets and provision their treasury shares, or perhaps sell them in six months. And who is going to buy Spanish bonds then? What is worse, the mandate could soon be imposed on all lenders, and it would be impossible for companies in our country to issue debt.
Further, the proposal would restrict credit markets just at the same time we have to cut the deficit. It puts us in the same place as Italy now that the market has valued our strengths before giving a chance to the incoming government. Is it logical that the collateral demanded by the European Central Bank would become a toxic asset, or that a debt forgiveness strategy would coincide with mandates to create a capital buffer?
Perhaps real estate assets would be provisioned in a way that cleans up accounts. But the debt forgiveness would become a serious liquidity problem given insolvency is a salient issue right now. Zapatero has to make sure that does not happen. If these are the solutions, it is not surprising that Merkel and Schauble lowered their expectations during the meeting. The craziness continues.
