Thu 5/31/12 11:27 AM – Cost of a Spanish Bank Bailout

The NY Times today put the total cost of bailing out Spanish banks at a total of $620 billion over several years. The bailout fund (European Stability Mechanism) which is scheduled to start up this summer has $867 billion in it. So, a bank bailout is do-able but of course most of the time such estimates end up being far too low. It could conceivably take all the money in that fund just for what may be a temporary fix for one country’s banks. Germany, the only large, strong economy in Europe right now would likely veto that idea, at least for now.

Beyond Spain there is Italy, Portugal and Ireland, all showing serious problems. The question, then is how much is it worth to keep all the major countries from severe recession and keep the Eurozone intact?

Compounding the problem in Spanish banks is that when the European Central Bank made very cheap money available to European banks a few months ago the banks spent most of it buying government debt on which the interest rates were rapidly rising. In fact, Spain’s banks own 67% of all Spanish government debt.

That heavy buying by banks served to bring down the rates on government bonds aka sovereign debt but it was only temporary. Now the banks have a great deal of money in bonds that are declining in value, leaving bank assets even lower and requiring even more bailout money.

This is a another example of government intervention that spends a lot of money for only temporary improvement.

Alternate solutions could be issuing Euro-bonds backed by all the memeber countries or an ECB guarantee of all Eurozone bank deposits instead of individual countries guaranteeing their own banks. Germany is opposed to both ideas.