With Spain’s banking system looking ever more parlous and the Damoclean Sword of Greek elections hanging over the financial markets, next week is not going to be for the faint-hearted.
Stock markets have endured another volatile week, rising early on before falling sharply just before the EU summit, then rising the day after – all this when very little changed on the euro zone landscape. Increasingly, the downward moves are sharper than the upward ones and there is little prospect of things settling before the June 17 Greek elections. It seems everyone is so nervous that if they are sitting on a day of gains, they cash them in double-quick.
Page one of the crisis management manual says get all the bad news out quickly. The handling of troubled Spanish lender Bankia has been an abject failure in that respect. First, the government said it would require about 9 billion euros to shore up, a few days on they are looking at 20 billion. One proposal doing the rounds is to create one nationalized bank out of a number of failed lenders. The big question, to borrow heavily from Louis XV, is: Apres Bankia la deluge?
It looks increasingly likely that Madrid will have to take a bailout for its banking system despite its protestations to the contrary. The money is there in euro zone rescue funds to cope but one of Spain’s only trump cards – that it had issued well over half the debt it needs to this year – may have disappeared after the government revealed that the publicly stated figure for the autonomous regions’ maturing debt – 8 billion euros for this year — is in fact more like 36 billion.
If Spain looked in real trouble (Greek contagion could play a part here) that might be the tipping point that persuades the euro zone to take more dramatic action. With German opposition to common euro zone bonds unbudgeable for now, a lot of the onus would fall on the ECB which, while deeply reticent to revive its bond-buying programme, could well be pushed into a third round of three-year money creation at some point. And if there was any sign of a bank run, plans for a deposit guarantee fund could have to be dusted off very quickly. Would that do the trick?