Follow this topicWhat does the Spanish bailout mean for you?
The Spanish bailout is better than nothing but there are still plenty of things to worry about in the Eurozone.
You’ve probably heard about the EU’s massive bailout of the Spanish banking system, but what does it mean for you?
1. It could help the UK banks
To recap, the EU has lent 100 billion euros to the Spanish government. The Spanish government is then using that money to support its banks.
If things go well, this bailout should stop Spanish banks from going bust. That’s good news for UK banks because they’ve made loans to the Spanish banking sector.
If the UK banks are convinced that Spanish banks will remain solvent, they may be a bit more willing to lend to British consumers and businesses.
2. Spanish property prices might stop falling
Spanish property prices have been falling recently because the Spanish banks have been in a ‘doom loop.’
Because Spanish banks have been struggling, they’ve been forced to sell some of their assets to improve their balance sheets. These assets have included property.
The sales have pushed down property prices which have then reduced the value of the banks’ remaining assets. So the banks have then sold more assets which has pushed down prices some more.
This bailout might now bring this doom loop to an end.
UK banks also have exposure to Spanish property prices so they should also benefit if prices are now stabilised.
3. It might avert disaster
Optimists could argue that the bailout has reduced the chances of a collapse of a euro.
A lot to worry about
Sadly, I’m not really convinced that disaster has been averted. There are plenty of things that we should still be worrying about. Let’s look at them:
1. The Spanish economy is sluggish
The Spanish economy is currently in recession with very high rates of unemployment.
The best way to trigger a recovery would be a devaluation of the currency. Devaluation is a very effective economic tool because it makes a country’s exports cheaper.
Trouble is, devaluation isn’t possible for Spain because, of course, it’s part of the eurozone. So, at best, the Spanish economy is only going to grow at a very slow rate over the next few years.
2. The Spanish government is now carrying more debt
Don’t forget, the Spanish banks have borrowed 100 billion euros to bail out the banks. Yes, the EU is offering the loan at relatively low interest rates, but the Spanish government will still struggle to repay its debts.
3. The Greek election could trigger fresh chaos
Greek voters are going to the polls on Sunday. If voters support parties who oppose Greece’s bailout package, fresh carnage could ensue.
4. No previous bailout package has solved the problem
We’ve had several bailout packages in Europe since 2009, and none of them have solved the massive financial problems that Europe now faces. The bailouts have never provided more than temporary relief.
I tried to be optimistic at the top of this article by highlighting potential positive effects from the weekend’s news. But in truth, these positive effects will only be short-lived at best.
The problem
Europe’s biggest problem is the euro. If the euro didn’t exist, countries such as Spain and Portugal could have interest rates and exchange rates that are appropriate for their economies. Then growth would start to pick up.
The least-bad solution to Europe’s problems is an orderly break-up of the euro. Perhaps into two zones – a ‘northern euro’ and a ‘southern euro’ – or you could have separate currencies for most countries.
A euro break-up would be painful and difficult, but it’s the only way to lance the boil. Sadly, there’s no sign that EU politicians are contemplating any such move.
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