FT Alphaville " No bail-in, Spain? Why shouldn't equity and (at least in the short term) Spanish bonds rally? It's a bank recap which was long overdue, and under the cover of which (at least some) losses will be recognised and absorbed. Meanwhile creditors of Spanish banks seem to escape taking losses in the restructuring of the system. All that, and there's been a great deal of spin already about a perceived lack of bailout conditions on the sovereign. There are no specific demands for fiscal change in the Eurogroup statement welcoming Spain's intention to ask for loans. Nor will the IMF - "It's Mostly Fiscal" - lend under a programme with conditions. The spin goes right to the top. This does not affect the deficit," according to Spain's prime minister. Well, two things. First, structural reform. Go back to the Eurogroup statement: The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances in the framework of the European semester. You can start to see why fiscal demands weren't made. Spain is already reporting to the European Commission under the Excessive Deficit Procedure, which was "reinforced" in last year's Fiscal Compact. If you already thought the Compact and things like the Six Pack reforms were witless unworkable austerity - the Spanish bank bailout still features witless and unworkable austerity. There just isn't the intensive internal devaluation you might see in Portugal, Ireland or Greece with quarterly inspections from the Troika. If you thought that Spain was already doing OK at improving export competitiveness on its own before the bailout, it will still be doing this on its own after the bailout. As a last point on this, Ireland could maybe feel a bit miffed about Spain avoiding fiscal conditions (anyone remember Sarko's campaign to raise the Irish corporation tax rate around the Irish bailout negotiations?). At the same time we'd recognise Karl Whelan's argument that Spain's deficit in 2012 is smaller than Ireland's was in 2010. Though you could then argue about how much of the Irish deficit already reflected banking rescues. Second, banking reform. When Spanish politicians talk about "no conditions," it seems to us that they really mean no oversight - i.e. no humiliating audiences in Madrid with the proconsuls of the Troika. We doubt that's how it's going to work, especially because the obvious conditions on the bank recap are clearly going to dig deep into Spanish society if they're applied. The whole reason we've got to this point is because of three years of consistent, bipartisan impotence and a culture of denial on the part of Spanish governments towards the cajas. The cajas are intensely political creatures. IMF/ EU oversight of these lenders, including the "horizontal structural reforms of the domestic financial sector" mentioned by the Eurogroup, means that a pretty big patronage system is about to be confronted by outsiders. How many of the cajas are non-viable? Should regional government ties to cajas be monitored? Our last point though is about how far the "recapitalisation tools" might go. We don't know how much of the €100bn is going to be needed, pending the current independent audit of bank loan books. But we've established that contrary to the spin pumped out by the Spanish government, it will continue guaranteeing this bailout of banks. Currently that means the recapitalisation bill includes making all Spanish bank creditors whole, whether senior or subordinated. But there's an interesting section in the EFSF's guidelines on its bank recap loans (the types of loan Spain would get if it does access the EFSF before the ESM): Where appropriate, additional conditionality could draw from the future EU bank crisis resolution framework, which will be proposed by the Commission after summer. In particular, such a conditionality could include requirements to enhance the supervisory toolbox in the three crucial phases of crisis management identified (preparation, early intervention and resolution) such as recovery and resolution plans, early intervention tools for supervisory authorities, asset separation tools, bail-in tools. This framework was unveiled last week, including bail-in tools for "as wide a range of the unsecured liabilities of a failing institution as possible." It's not supposed to come online until 2018 though here the EFSF says it "could draw from" the measures. If Spain ends up borrowing solely from the ESM, we'd assume that the ESM guidelines on bank recap loans won't depart too far from the EFSF. We doubt they'd have the guts to do it. But as we said, in a "no conditions" bailout - interesting stuff. This entry was posted by Joseph Cotterill on Sunday, June 10th, 2012 at 16:15 and is filed under Capital markets. Tagged with bail-ins, bank debt, Sovereign debt, Spain, spanish banks.