Even though a bailout of Spain's financial sector does not suggest that credit will return to the country immediately, which Minister of the Economy Luis de Guindos seemed to imply in a speech he gave on Saturday, this is its ultimate goal.
Spain is preparing for another lackluster year for the credit markets as lenders face more provisioning requirements and the Spanish banking sector looks to take on the more provisions than any other European country.
It is just this effort that will prevent credit from reaching companies and individuals. After all, banks can't afford to take on more risk when they have to increase their holdings. Money will start flowing again only once banks have cleaned up their balance sheets and start to recovery from the shock therapy the endured during financial sector reforms.
That is a long race to run, and doubts are still lingering about the loan conditions of the bailout. Yesterday, two commissioners from the EU, Joaquín Almunia and Olli Rehn, made it clear that the price will be high. They mentioned that bailed-out banks will pay the FROB interest rates upward of 8.5%. Further, supervisory and regulatory conditions will be applied to the entire banking system, and more specific requirements for some banks. Some banks will not be able to withstand the expensive loan repayments and intense monitoring. And even though a systemic failure is unlikely, we will have to let single firms fail if necessary.
The EU should decide on bailout loan conditions as soon as possible, because uncertainty is undermining the economy. Yesterday, Spanish treasuries reached a high of 6.7%. Past 7% there would be no chance of recovery in Spain. We wait patiently through critical days to learn the exact conditions of what will prove to be a difficult year.
