Bank bailouts: another fix
Break out the cava. EU policy makers (Hello, Angela Merkel) have caved in to Spain and Italy by agreeing a deal on bank (and country) bailouts. Crisis solved? Hardly. The triumphalist reaction in Madrid is premature. True, this week’s EU summit agreed on breaking the bank-sovereign feedback loop, so stopping shaky banks from laying low their sovereigns – and vice versa. Unless politicians get cracking, it could take until the end of the year to put the plan into practice – and Spain may need its €100bn bailout sooner.
The trouble is that despite EU agreement that future bailouts in the eurozone should flow directly to banks via the European Stability Mechanism, it first wants to establish a single eurozone bank supervisor under the European Central Bank’s aegis. That is in politicians’ hands. Centralising bank supervision is a decisive step towards eurozone banking union. But the precedent of the European Banking Authority, the regulator set up two years ago, is hardly encouraging: it still struggles with resources and national bickering.
For Spain, the key thing is that, once the new supervisor is in place, those bailout funds will no longer need to sit on its balance sheet. The prospect of higher state debt had pushed Spain’s borrowing costs above 7 per cent in recent weeks. The yield on its 10-year bond fell on Friday to 6.4 per cent. Italy’s has also fallen to 5.8 per cent after it won agreement for the eurozone’s bailout fund to buy sovereign debt. Bank shares rose because the new bailout structure avoids handing governments preferred creditor status – a relief for bondholders.
The new measures are not a total fix, but a good start. Execution will be critical. Direct investment in banks’ equity à la UK and US is still the cleanest model. Something for the new regime to get its teeth into.
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