Regular readers know that this interpretation of why Spain is losing access to the capital markets solely reflects bankers' worries over whether or not they will be paid their bonuses.
The capital markets know that bailing out the banks is unnecessary.
Under a modern banking system with deposit guarantees and access to central bank funding, banks are designed to absorb all of the losses on the excesses in the financial system today. Subsequently, banks can continue to operate and make loans to support the real economy while they rebuild their book capital levels through retention of future earnings.
The IIF published a report that indicated it will take less than 4 years for Spain's banks to generate sufficient earnings to rebuild their book capital levels. Four years suggests that recapitalizing the banks today is much ado about nothing.
The capital markets are worried that the Spanish government will undermine the perceived strength of its deposit guarantee by recapitalizing its banks and as a result, trigger a bank run. This occurred in both Ireland and Greece.
Spain's Budget Minister Cristobal Montoro on Tuesday urged euro-zone partners to act faster to help support its enfeebled banks, saying that the government has effectively lost access to capital markets because of steep risk premiums demanded by sovereign bond investors.
In making this dramatic admission, Mr. Montoro joined recent calls by the Spanish government for direct aid from European Union institutions for Spanish banks as the government hopes to avoid a full-blown bailout package...As discussed above, Spain's banks do not need the bailout.
What we are talking about here is that bankers in other EU countries would like Spain and its banks bailed out. If Spain and its banks are not bailed out, there is some chance that the banks in other EU countries will have to recognize a loss on their Spanish exposure. This loss might prevent the bankers from being paid their bonuses.
"What this premium tells us is that the state, and Spain as a whole, has a problem when it comes to accessing markets, when we need to refinance our debt," Mr. Montoro said in a radio interview. "What that premium says is that Spain doesn't have the market's door open, as such, the challenge is to open that door and regain the confidence of those markets, our creditors."Regaining confidence is a function of requiring ultra transparency from the Spanish banks and not getting an EU bailout.
The warning from Madrid was reminiscent of similar alarms over prohibitive borrowing costs sounded by Greece, Portugal and Ireland before entering into bailout talks with such international lenders as the European Union and the International Monetary Fund.History shows that those bailouts did not work out for the countries involved. They did work out well for the bankers in the countries that lent money. They were effectively bailed out of their bad decisions. As a result, they not only got a bonus for making a bad lending decision, they also get a bonus for the bailout.
Heads the bankers win, tails everyone else in the EU loses.