Here Come the Men in Black?

Of all the comments on Spain’s new bank recapitalization agreement, Germany’s seems most apt: “It is good that we now know that an aid request is on its way.”

For that’s all Saturday’s agreement between Spain and the “eurogroup” (eurozone finance ministers) is—not a state bailout ü la Greece, Portugal and Ireland or, as Spain’s budget minister put it, a rescue from “the men in black.” It’s a provisional line of credit for Spain’s bank bailout fund: Spain announced it intends to request up to €100 billion in “European financial help” for troubled banks, and the eurogroup agreed to lend to the Fund for Orderly Bank Restructuring (FROB). Spain still intends to issue sovereign debt as usual—the government isn’t seeking assistance with its normal obligations (at least, for now). And judging by last Thursday’s successful auction—Spain met its maximum target despite escalating bailout chatter—Spain can likely still obtain funding on primary markets.

Officials have said the EFSF or ESM will make the eventual loans, and they’ve confirmed any loan will add to Spain’s general public debt. But beyond that, details are scarce. EU economic chief Olli Rehn said that upon Spain’s formal request, the ECB, IMF, European Commission and European Banking Authority (dubbed “the quartet”) will analyze Spanish banks’ restructuring and recapitalization needs, determine each member state’s contributions and sign a formal agreement with Spain. That “memorandum of understanding” will likely include conditions on financial sector reform, but Rehn and others have said they won’t demand the deep spending cuts and economic reforms mandated in fully bailed out nations—partly since it’s not a state rescue and partly since Spain’s already made substantial progress.

Because so much remains in flux, the implications for Spain aren’t yet clear. €100 billion is the upper bound of what most expect Spain’s banks to need, but independent auditors’ assessments, due June 21, will give more clarity on the actual loan amount. Some also suggest adding to Spain’s outstanding debt could heighten investors’ perceptions of sovereign risk. That’s indeed possible, though even if Spain takes the full amount, its debt to GDP would likely be only just over 90% by year end—high, but still the lowest of the PIIGS.

Potential implications abound outside Spain, too. Ireland’s rumored to be seeking to renegotiate its own bailout. Lest we forget, Ireland was a unique case from day one—a competitive economy with a robust private sector, whose debt became excessive only after it bailed out its own troubled lenders in 2009/2010. If an arrangement like Spain’s were available before Ireland propped up its banks, Ireland may well have signed up, foregoing a full bailout and austerity mandate it didn’t much need. Now, conventional wisdom in Dublin says that if Spain—with its similar banking troubles and less competitive economy—gets a more flexible arrangement, so should Ireland.

Over in Greece, which votes again June 17, Spain’s deal is campaign fodder. New Democracy leader Antonis Samaras spun it as an example of EU leaders’ willingness to be flexible with peripheral nations, provided they’re committed to an open dialogue and take “the road of responsibility.” One could interpret that as a tacit statement of intent to renegotiate some of Greece’s terms, perhaps stealing some of Syriza leader Alexis Tsipras’s leverage. And Samaras’s diplomatic approach may prove a touch more effective with voters than Tsipras’s claims that EU methods are “completely ineffective and socially disastrous.” After all, which man seems more likely to chart the pragmatic course needed to keep Greece in the euro?

Finally, as ever, the Angela angle: One week ago, the German Chancellor all but ruled out direct aid from the EFSF/ESM to the FROB, but in the days following, her rhetoric got incrementally softer. Merkel herself has thus far kept mostly mum on Spain’s deal, but it’s pretty clear she agreed to compromise—otherwise, her finance minister wouldn’t have supported it. That underscores what we’ve said for a while: While Merkel’s domestic political challenges may force her to take a hard line, her will to prevent the euro’s near-term collapse prevails, and she seems willing to compromise as needed to that end. That flexibility will be key to the negotiating and politicking likely ahead.