Bailing out Spain’s banks

I do not understand economics that well (or at all), but there is no doubt that the current situation in Spain is grave, as two crises – financial and sovereign debt – manifesting in Europe are combined, even if the most immediately pressing problem is Spain’s banking sector. It is beyond Spain’s ability to reassure the depositors and calm down the markets, and it will need funds from the EFSF, despite earnest protestations to the contrary by Mr Rajoy and his government: given its fiscal position, Spain has no wherewithal to pour money into its banking sector, and the banks need money, badly.

Speculations abound that Spain will be asking for money from the EFSF this weekend, before the markets open on Monday, to recapitalize the banks. According to media reports, the EFSF will not be lending directly to Spain or its banks, but will provide bonds that Spanish banks can use to draw money from the ECB. Spain’s economic and fiscal positions are pretty grim, so a failure to act on its banks will have serious repercussions to the state’s credibility. This is one episode in the current crisis, that sets to continue for some time to come.