It has been abundantly clear that Spain would need a bailout for its sick banking system, and rumours have emerged that this could happen as early as this weekend. I doubt that the details of a plan will be agreed so soon as an independent stress test of the Spanish banking system is still being carried out by Oliver Wyman/Berger (results due June 18th). Much more likely, EZ leaders will once again to plan to make a plan to make a plan to bail out the Spanish banking system. What are EZ policymakers trying to achieve with a Spanish bail bailout, and can they succeed?
With rumours about an imminent Spanish bank bailout at fever pitch, many have asked “why now?” EZ leaders will try to achieve three things with a bailout for Spanish banks.
First, there is a direct connection between Greece and Spain in terms of their banking sectors. We have witnessed a “bank jog” in Greece for months, which intensified in May. There were some reports of a bank run in Spain as well, though this is only true among foreign depositors in Spanish banks. A bailout for Spanish banks could be aimed at preventing a bank run from ripping across the periphery. EFSF/ESM money for Spanish banks is unlikely to succeed in avoiding a bank run, however. Depositors in the EZ periphery are withdrawing their money from banks over concerns about their countries leaving the EZ and their savings being redenominated and devalued away. A bailout for Spanish banks is very unlikely to allay these concerns.