Careful what you wish for

Mariano Rajoy has won a victory, of sorts. Germany yielded to the Spanish prime minister’s request that the Euro zone should be able to prop up his country’s teetering banks directly. If that happens, the state’s debt load won’t need to shoot up by euro 100 billion.

But there are many unanswered questions - including when, on what terms and even if Spain will tap the funds. This is because Germany’s Angela Merkel insisted that such direct bank recaps can only happen once there is an effective new banking supervisor for the whole region, based around the European Central Bank. And that won’t happen until the end of the year, at the earliest. The snag is that Spain’s banks need their recapitalisation sooner. So there will have to be a bridging operation — with Madrid borrowing the money first and that loan eventually replaced by direct funds to the banks.

Another problem is that Madrid will be injecting more money into the banks than they are worth. Just look at BFA-Bankia, the bailed out lender. It has requested euro 19 billion in fresh capital from the state, and an independent expert just determined that BFA, the parent, is worth a negative euro 13.6 billion.

Who would bear these losses?

It will be hard for Germany to agree a bailout that immediately inflicts losses on its taxpayers. But equally Spain won’t want a bailout that crystallises losses for its citizens. Nor will it want to inflict losses on the banks’ subordinated bondholders, as just over 60 per cent of those are retail investors.

Then, there is a question of what Spain will have to do to clean up its financial sector in return for the money. To be fair, conditions will be set whether Madrid borrows the money or the cash goes direct to its lenders. But this still could be a bone of contention.

To recap, the Euro zone has agreed to use a mechanism which doesn’t yet exist to recapitalise banks on as yet unspecified conditions which Spain may or may not like. No wonder, progress in the Euro zone is slow.