Markets around the world were celebrating today, at least for a little while. Overnight, Dow
The news? Spain's getting a bailout.
The bailout's terms remain vague, but it appears to lack the hard-line conditions that have punished past bailout recipients. By targeting the financial sector exclusively, it also leaves the rest of Spain's government with greater freedom to seek continued open-market funding, which has been difficult for Ireland, Greece, and Portugal to obtain post-bailout. Still, past conditional bailouts have failed to stop other eurozone nations' slides. Political and economic blowbacks, in Spain and across Europe, might torpedo a flagging global recovery. We may not have long to find out.
What's the big deal?
The basics of "Spailout" are pretty straightforward. Spain will get access to up to 100 billion euros (or about $125 billion) from the European Financial Stability Fund to fortify its reeling banking sector. In exchange, it agrees to… well, that's still being worked out.
Ireland, Greece, and Portugal have all submitted to harsh spending restrictions as a condition of their bailouts, but those funds were directed toward troubled governments rather than their banks. Ireland's leaders are already making some noise about renegotiating their bailout deal.
New York Times columnist Paul Krugman called the effort "EuroTARP," which might be the most accurate description yet:
A Spanish government agency will give banks cash, presumably in return for an ownership stake, with the goal of reassuring depositors and interbank lenders that their funds will remain safe even if the banks turn out to have big losses; the point is that these losses will initially come out of the new cash hoard, so that default on debts won't happen.
The twist is that the Spanish government itself is cash-poor and must pay high rates to borrow on the market, so this money comes as a loan from stronger European economies, presumably at below-market rates.
That makes the other euro bailouts more akin to the 2009 Recovery Act, in that each offered substantial fiscal relief from a larger and more stable entity to smaller and more fragile governments. That's right; a big part of the stimulus package was aid to state and local governments.
These helicopter drops were failures on both sides of the Atlantic. State and local governments across America employ 632,000 fewer employees today than they did when the Recovery Act passed. Of the three eurozone bailout recipients, only Ireland has seen unemployment shrink since its package was approved, and that decline is only three-tenths of a percent. Portugal and Greece remain mired in deep recessions. Ireland's growth has proved fleeting, with only one post-bailout quarter of GDP growth above 1%.
If America's TARP is any indication, Spanish banks with big portfolios of bad loans might get some relief, but don't expect to see that lighter load passed on to the Spanish people. The promoted intent of TARP, to "get banks lending again," has been a failure. Total loan volume, including real estate loans, business loans, and leases, are all lower today than they were when TARP passed. Total consumer credit is below 2008's levels. Revolving credit (that is, credit cards) is far below where it was when TARP passed.
If you're looking for long-term profits in a post-bailout Spain, you might want to keep looking. Not one of the six largest American banks has fully recovered to its TARP-passage-day values, although JPMorgan Chase
You might be able to play Banco Santander
The sad fact is that a $125 billion bailout probably isn't enough for Spain. JPMorgan analysts have calculated the total cost of an effective Spanish bailout at over $400 billion. Even so, it's hard to see how more money would solve Spain's huge problems, namely a generation-destroying level of youth unemployment and a shriveling economy that remains over-reliant on a popped-bubble housing sector. This bailout -- strings or not -- is a bandage over a sucking chest wound.
Eurozone leaders, for all their talk, have always been reluctant to line up their worst-performing nations on the bailout-bazooka firing line before first stabbing them a few times with austerity. They may not have this pointy weapon in their arsenal any longer if Spain's package arrives without severe conditions, which means the condemned are now the ones with the real power.
Greeks are set to go to the polls in a week to resolve problems raised by last month's election, and they now see a European neighbor getting off easy as the vise turns tighter on their own country. They won't be happy. If the leftist Syriza party gains power in Greece -- or worse, a coalition of fascists and other extremists sweep into office -- it's very likely we'll see threats and bullying from Athenian leaders who know their country now has less to lose than Germany from a Greek euro exit.
That's just the most immediate danger. Italy, largely ignored until this morning's hangover kicked in, is back in the foreground as the next likely bailout target. Spanish Prime Minister Mariano Rajoy urged his finance minister to take a hard negotiating stance because he expects that the combined Spanish and Italian bailouts could reach over a trillion euros. Knowledge of those tough tactics could weaken stabilization efforts across the eurozone as floundering governments bully Germany. Save us and save yourselves, or we'll ruin you. That's the gist of it.
There's one other possibility that now seems remote: Everyone gets bailed out, no one gets tied down by austerity conditions, and Europe moves closer to a true political union. The faster money flows from strength to weakness, the greater the need for integration -- or the greater the pressure to cut ties. We've heard that European leaders are committed to a united Europe at any cost. Now's their moment to prove it.