The country plans to access long-term capital on Thursday with the sale of 4% bonds due 2020 and 4.7% bonds due July 2041. Not coincidently, several press reports have come out suggesting that Spain is in discussions with the ECB and IMF regarding a bailout. Though Spain has vehemently denied these reports, a disappointing auction on Thursday could expedite said discussions. A seize up of interbank lending in Spain has already forced Spanish banks to borrow record amounts directly from the ECB. According to the FT, Spanish banks borrowed €85.6 billion from the ECB last month, more than double the amount lent to them prior to the collapse of Lehman and up from €74.6 billion in April ("Spanish banks break ECB loan record"). In my opinion, given Spain’s devastated economy and weakened banking system, it is only a matter of time before the country directly taps emergency loans from the ECB’s €440 billion stability fund.
However, as a true cynic, I believe talk of an IMF bailout of Spain has been purposely leaked in order to encourage investors to participate in the upcoming auction. Hank Paulson’s analogy about having a bazooka in dealing with Fannie & Freddie serves as a useful illustration in understanding the tactics employed by the ECB in attempting to avoid a direct bailout of Spain. Here is Paulson’s quote:
To Senate Republicans worried they’re being asked to write a blank cheque for federal support to mortgage brontosauruses Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson offered an intriguing analogy on Tuesday: “If you’ve got a squirt gun in your pocket, you may have to take it out. If you’ve got a bazooka, and people know you’ve got it … you’re not likely to [have to] take it out.” In other words, give me an unlimited line of credit and I probably won’t have to draw on it. But give me X billion and force me to come back for more in three months after that hasn’t worked, and you’ll persuade people the U. S. government is powerless. Then where will we be?
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