According to the consulting firms hired to assess the health of Spain's financial system, Roland Berger and Oliver Wyman, the system needs 62 billion euros at most, or just over that the European Commission has agreed to offer. The amount would cover the worst case scenario: Spain's GDP dropping 6%, a situation that has around a 1% chance of happening.
Because so many unsure months lay ahead, it's hard to be confident that Spain can manage it situation well. Initially the country requested a smaller amount of funding, but the Bankia nationalization and the 19 billion euros required to clean up its accounts sounded alarms inside and outside Spain. If just one financial firm needs that much help, what could happen with the rest of the system? We have to wait until September, when needs estimations for all firms is complete, to know the true extent and cost of the damage. That said, the damage is already done, and the cost will now be two million euros more. Roland Berger and Oliver Wyman charged this amount for their assessments.
The question now is whether knowing the banking sector's needs will calm uncertainty. Yes, it's important to know the maximum amount of funding that we need before formally asking the EU for aid. Why? Because knowing this amount will establish a goal to shoot for and increase our credibility. But nerves won't settle until all unknowns are clarified, and at this time there are many unknowns. Markets are concerned about who will end up financing the bailout and what investors will receive their money back first should banks default. The market fears that the loan will be administered through the European Stability Mechanism (ESM). This tool gives brokers priority. If investors think they?ll have more difficulty getting their money back, they will continue to demand high interest rates for risking their assets, which could translate into an elevated risk premium. Further, Spanish banks are restless and urging the Spanish government to wrap up the loan negotiation quickly so that they will know who is allowed to ask for the aid. The problem has to be defined in order to avoid contagion.
The government already wasted too much time. It's good that it is trying to soften demands, but this chapter of the crisis must be closed now. Also, we can't forget that all the delayed decisions ultimately undermine those very same decisions. The bad bank measure is a good example. Yesterday Fernando Jiménez Latorre said that the European Commission likes the idea of creating a bad bank in Spain. This option was considered before Guindos? first financial reform bill in February, and it's going to be considered again in May, this time more seriously. But the measure is rife with doubts, too, because this tool cleans up balance sheets by splitting off toxic assets. Like tucking something ghastly under the rug instead of dealing with the thing itself, the bad bank is not a sustainable fix.
The Spanish government has ruled out selling several non-viable institutions according to what European Commission member Joaquín Almunia said. While true that the sale could be end up more expensive, the EU could also reject the restructuring plan of a bank that the Commission deems unhealthy. In that case, the option would be to nationalize the bank using FROB money, and once the hole is patched up, sell the bank. There are so many doubts that markets won't calm down by citing mere figures.
