The Spanish Bailout Isn't Working

It was designed to ease investor fears but Europe's $125 billion bailout of Spanish banks is already falling short.

It was designed to ease investor fears but Europe's $125 billion bailout of Spanish banks is already falling short. For a few hours on Monday, the agreement by 17 European countries to shore up Spain's debt-ridden banks sharply lifted global markets. But by Tuesday morning, the thrill was gone and concerns of contagion spreading beyond Greece and Spain spooked markets, policymakers and other debt-ridden nations.

• The markets. In Bloomberg this morning, Jonathan Burgos and Adam Haigh survey Asian markets and the response doesn't look good. Asian stocks plummeted with the MSCI Asia Pacific Index dropping 12 percent from its peak on Feb 29 in a sign that Spain's bailout "won't tame the European debt crisis," they write. “There appears to be plenty of cynicism,” George Boubouras, an investment strategist at UBS, told the news wire as Japan's Nikkei declined 1 percent. “Contagion concern is still pretty much alive,” Eddie Tam, chief executive officer of Central Asset Investments, added. “We’re staying on the sidelines at least until the Greek election results.”

• The neighbors. In The New York Times, Liz Alderman and Elisabetta Povoledo spotlight how fears about Spain's troubles are spreading to other countries, Italy in particular, as investors began selling stocks and bonds fearing that the southern European country could be the next domino to fall. "The main fear is that Italy cannot grow its way out of a recession fast enough to pay a mountainous national debt. Other concerns include the fact that Italy, with the third-largest euro zone economy after those of Germany and France, will have to shoulder a large portion of the bailout bill even as it grapples with its own sharp economic downturn."
• The Fed. Over at Reuters, Jonathan Spicer reports that three Federal Reserve policymakers are sounding the alarm that the Spanish bailout isn't enough. "Markets are looking for the details of how much will be injected into what banks, whether that will be sufficient to stabilize those particular banks ... and what the terms and conditions are," Atlanta Federal Reserve Bank President Dennis Lockhart told reporters. Spicer said the officials are "warning that much is yet to be done to avoid global spillovers" citing its potential to damage the U.S. economy. "The European situation is one that we're monitoring very closely," said Charles Evans, head of the Chicago Fed bank, "and it does give one pause about what it means for the U.S. economy and the global economy." 

So why isn't the bailout working? The experts are split. The Telegraph's Jeremy Warner says "Like all the others, the latest fix seems to create as many problems as it solves." That's because the bailout forces Spain to borrow money that private markets won't provide directly to it. "Because the bailout money takes on the position of preferred creditor, it subordinates other bondholders, thereby making it even harder to raise money from the capital markets." The Atlantic's Matthew O'Brien, however, says the bailout hasn't soothed investors because Europe hasn't been transparent enough about its terms. "The devil is in the details, and the Europeans have been embarrassingly short on those," he writes. "They haven't said what that rate is. It's hard to judge how good a deal Spain is getting without knowing this.” Meanwhile, Politico's Ben White says the main problem is markets want bolder action. "Markets are demanding something much bigger and bolder (continent-wide deposit insurance, pooling of sovereign debt, a single banking authority etc)" he writes.