Quick market comment on the Spanish rescate

The Spanish loan and the statements around it are a big deal, IMO. That a deal for Spanish banks was in the works has been clear. What the statements and official comments have brought into sharper focus for me is how much commitment there already is to build a banking union and, in the more distant future, fiscal union.

The takeaway, however, is not that I now think they are going to make it, at least not to fiscal union. Nor do I think this will materially change Europe’s fatal flaw: its growth prospects. But there are two significant positive implications from a market perspective:

  1. It is now more clear to me than ever that the bad risks in the system will migrate fairly fully to the balance sheets of the public sector (either explicitly of by contingent liability) by the time this is over.
  2. They’ve bought themselves another chunk of time.

Together, this suggests that when—X years from now—the peripheral countries realize their growth trajectories are insufficiently robust to get them out from under their debt burdens, and some enterprising politician tells them they should not subject themselves to the Nth round of belt-tightening, the reverberations through markets when countries leave the single currency will be much less than they would have been if markets hadn’t already largely passed the hot potato to the public sector.

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