With good reason, Spain fears terms from AAA EU nations

The Telegraph's Ambrose Evans-Pritchard points out that Spain's prime minister is reluctant to ask for a bailout for fear of the terms that the AAA EU nations will impose.

In case Mr. Rajoy has any doubt about the cost his country will have to bear to preserve the bonuses of the German and other AAA EU nations' bankers, he just has to look north at Ireland (or west at Greece).

In return for a bailout that was used to repay the unsecured debt to German and other AAA EU nation banks, the Irish government effectively yielded a substantial portion of its sovereignty.  For no benefit to the Irish citizens, the Irish government agreed to make them debt slaves.

I would hope that Spain's government takes a different approach and follows Iceland's lead.

Iceland made its banks absorb upfront the losses on the excess debt in the financial system that the banks would have realized had they gone through the long bankruptcy procedure.  Having the banks take a loss meant that the unsecured creditors of the banks also had to take a loss.

Did the world come to an end?  No!

What did happen is that Iceland saved its real economy and society from the damages that would have been inflicted upon them had Iceland bailed out the banks and socialized the losses.

The same would happen for Spain if it followed Iceland's lead.

Mr. Rajoy and his government face a clear choice:  preserving Spain's real economy and Spanish society or turn Spain into a debt slave.

Fear of escalating demands by Germany, Finland and Holland is a key reason why Spanish premier Mariano Rajoy continues to drag his feet on a full sovereign bail-out. 

Spain's refusal to act has frozen the eurozone rescue machinery and begun to rattle markets. The European Central Bank will not buy Spanish bonds until the country requests aid from the European Stability Mechanism (ESM) and signs a "Memorandum" giving up fiscal sovereignty. 

Finance minister Luis de Guindos told Spain's parliament Wednesday that there will be no bail-out until the terms are clear. "The government will take the best decision for Spain and its European allies when it knows all the details," he said. 

Finland has become the greatest worry. "Rajoy is terrified that the Finns will say `No' after he has requested a rescue," said a Spanish economist with close ties to the Rajoy team. 

Miapetra Kumpula-Natri, head of the Grand Committee on Europe in Finland's parliament, said Finnish lawmakers must vote on any deal and would make their own decision. 

"Our national law on the ESM is very tight. If the budgetary risks for Finland increase, or if there is any change to the ESM's preferred creditor status, we will have to evaluate it," she told The Daily Telegraph. 

True Finn leader Timo Soini said the parliament would demand high-quality collateral from Spain, complicating any deal.

By requiring high-quality collateral, Finland is not exposed to Spain's credit risk.  It gets to claim it was helpful without doing anything (Spain could have gotten the same funds by selling the collateral).

"Don't underestimate the fury of Finnish taxpayers. Almost everybody here thinks the bail-out policies have failed and that we are paying to rescue French and German banks," he said.

Mr. Soini is right.  A bailout is nothing more than a needless rescue of the French and German banks.  These banks are fully capable of absorbing losses on the excess debt in the global financial system and continuing to support the real economy.

There is no reason for the Spanish taxpayer to bail them out, particularly when Spain needs every euro it gets from its taxpayers to support its real economy and social programs.