View From Madrid: The Cost of Saving the Euro
Morningstar Spain's Fernando Luque explains the reaction in Madrid to news of a bank bailout, further problems facing European governments, and a potential outcome for the eurozone.
Holly Cook: The latest development in the eurozone debt debacle was the recent news of EUR 100 billion bailout of Spain's troubled banks. I'm joined by Fernando Luque from Morningstar Spain to give us the initial reaction on the ground to Madrid.
Fernando, great to have you with us. So, tell me what's your assessment of this latest news?
Fernando Luque: Well, I have to admit that I have been surprised by the urgency of the decision, but I think that there is good news and bad news attached to this bailout. The good news is that finally the Spanish government is recognizing the problem of the banking sector, or at least part of the banking sector, because it's important to say that not all the Spanish banks have problems. Only 30%, according to the International Monetary Fund, need more capital. Now the good news, at least from my point of view, is that we are closer to the big solution to the eurozone debt and that means that the European Central Bank will definitely at the end act more aggressively on the bond market buying Spanish bonds directly.
The bad news is that at the end, this bailout will mean, in my opinion, more debt for Spain and more pressure on the Spanish bonds. Many people have the impression that we should have done this bailout three years ago. We have lost a lot of time, and we still don't know if EUR 100 billion will be sufficient to save the financial sector.
Cook: How have the markets responded to this?
Luque: We can't say that the bailout has been a relief for the bond market, and don't forget that that was also the objective of the bailout. In fact, our 10-year bond rate is reaching its record high. So the response from the bond market has not been very positive.
In the stock market, the initial reaction was a little surprising considering that we still don't know many of the details of this bailout. We don't know, for example, how much we will pay for it. We don't know that the maturity of these loans, and more importantly, we don't know the conditions attached to these loans. This is because one thing is to say that the money will be used exclusively to save the banking sector; that is the official message. And another very different thing is to say that the loan will not affect the public debt. Of course, it will affect the public debt because what we know certainly is that the government is ultimately responsible in paying back these loans.
Cook: So what's next for the eurozone?
Luque: Clearly the focus now is, I think, on the Greek elections, obviously, because independent of the result of this election, the Greek problem will not be solved on the short term. The Greeks don't want to leave the euro, but at the same time they don't want to accept the Eurogroup's conditions. Another danger is a possible contagion to Italy. And regarding Spain, the risk is that the bank bailout turns into a government bailout like the one we have seen in Greece, in Ireland, and in Portugal in which we have to admit very little success and very negative consequences, forcing the European Central Bank to implement more aggressive measures, but also forcing some governments, specifically Spain, to adopt stronger fiscal and stronger banking integration at the European level. That means losing some of the sovereignty, but that will be the political price to pay to save the euro.