Today, Portugal, Cyprus and Spain have either, respectively, pumped in cash into their banks, will ask for cash or, in case of Spain, are told by Germany to accept the cash.
Portugal dumped 6.6 billion Euros into 3 of its banks and this would release 4.1 billion in IMF cash.
Cyprus also said that it may seek bailout money to fund its second largest bank with 1.8 billion.
Spain, according to Spiegel, “insists that it can recapitalize its banks by itself” but Germany says that Spain must be “forced to accept bailout money from the European Financial Stability Facility (EFSF)”.
“Government experts in Berlin estimate that Spanish banks need between €50 billion and €90 billion in fresh capital. Madrid, however, has so far resisted applying to the EFSF for funding,” says Spiegel.
With the talk last year that the EFSF maybe inadequately capitalized, is there a first move calculation in today’s bailout edition?
For itself, Spain is running out of cash to fix its banks. It has only 5 billion Euros left in its account designed to rescue its banks yet it needs 19 billion just for Bankia. Some suggest that Spain may need up to 150 billion if it is to rescue its banks.
Then there is a lingering question of Greece – will it exit Eurozone or not – and if it does not how can it continue with the IMF-imposed austerity.
Interestingly, by the IMFs own admission, however, the reason that Iceland has been successful after its banking industry, 1000 times the size of its GDP, collapsed is that it there was no austerity and the IMF went along with it.
“Key to Iceland’s recovery was an IMF-supported program worth $2.1 billion that was agreed in November 2008, shortly after the country’s three main banks collapsed in spectacular fashion. The program included controversial measures such as capital controls and a decision not to tighten fiscal policy during the first year. It also sought to ensure that the restructuring of the banks would not require Icelandic taxpayers to shoulder excessive private sector losses,” says the IMF with emphasis added.
Iceland, of course, had its own currency that absorbed the shock, but, as Arvind Subramanian of Peterson Institute for International Economics wrote in the Financial Times in March: “Just look at what happened to the countries that defaulted and devalued during the financial crises of the 1990s. They all initially suffered severe contractions. But the recessions lasted only one or two years.”
The problem, as Subramanian points, is that politicians in the Eurozone see a successful Greek outcome as a template for other Eurozone members to follow… and that can spell doom for the union of Europe.
“Suppose that by mid-2013 Greece’s economy is recovering, while the rest of the euro area remains in recession. The effect on austerity-addled Spain, Portugal, and even Italy would be powerful. Voters there would not fail to notice the improving condition of their hitherto scorned Greek neighbor. They would start to ask why their own governments should not follow the Greek path and voice a preference for leaving the euro area. In other words, the Greek experience could fundamentally alter the incentives for these countries to remain in the euro area, especially if economic conditions remained grim,” says Subramanian.