Spain Getting Ready to Bail Out Cajas . . . with More Debt

The Wall Street Journal is reporting a scoop this morning: Spain is getting ready to issue €3 billion in bonds during the coming days, and a total of €30 billion altogether, in order to save the cajas (local savings banks). The Journal sums it up best:

The fate of the cajas is inextricably tied to the fate of Spain and potentially to the euro itself. Fear that the savings banks can't raise funds on their own and will need a government bailout was one reason ratings agency Moody's put Spain's rating on review for a downgrade last month.

This morning, Spanish sovereign 10-years had a 2.307 spread over German debt—but the news has yet to sink in, so let’s see how the evening’s spread goes.

Clearly, the Spanish government is bouyed by last week’s successful auction—and by discovering it has a new friend in China. 

If—and that’s a ginormous If—the Spanish can somehow thread the needle, and postpone the insolvency of the cajas and raise the money and all the rest of it, then the question remains: How is Spain going to get back on track? It has 20% unemployment, it has a huge sovereign debt load which—though not at Greek or American levels (and bet you never ever thought that comparison would be valid)—is still exceedingly troubling. 

If the Journal story is accurate, and Spain is going to be auctioning off €30 billion to save the cajas, then we have the Irish problem all over again: Private sector losses in the banking sector being put on the public balance sheet, to the point where it might eventually sink the nation.

So all told, this is not a solution to anything concrete just yet: Just postponement—or really just rearranging who’s got the bad debt and who is scot-free.