Don't drop the money and run

To be successful, Spain’s bank bailout should be a takeover. Euro zone governments have so far been vague about the exact “conditionality” they will attach to recapitalising the country’s lenders. Nonetheless, that vagueness is indicative of the direction they’re heading. There’s the classic restructuring of the banking sector, which will be supervised by the European Commission’s competition authorities.

Then there is what the euro zone governments called “horizontal structural reforms” which could signal the end of Spain’s politicised banking system. Madrid may resist on sovereignty grounds. But there’s little it can do.

EU authorities have no template for taking over a country’s banking sector. But the International Monetary Fund’s report on Spanish banks, released on the eve of the bailout, offered some suggestions that cut to the heart of the current system. In particular, the IMF recommends more direct regulatory powers for the Bank of Spain, which currently relies on the government for its authority. The IMF also called for the introduction of a bank resolution scheme that would impose losses on both shareholders and bondholders, which have largely escaped any pain so far. However, any new rules are unlikely to be in place in time to reduce the current bailout bill.

The most difficult reform will be to end the decades-long tradition of cronyism at the former savings banks, whose overhaul is still a work in progress. That will mean Spain’s bailout fund, the FROB, replacing existing management teams, and possibly taking controlling equity stakes. Arguably it will be easier for the European Commission, the European Central Bank and the IMF to push for such reforms, allowing the Spanish government to employ the “euro zone made me do it” excuse.

Ideally, the troika should keep the leverage of disbursing its funds in tranches, instead of paying out the whole amount in one go. There may be some tough conversations ahead with the Spanish government, when it becomes clear that some sovereignty has to be surrendered. But Madrid’s partners should make it clear that they aren’t prepared to spend up to ^100 billion in order for Spain’s banks to continue with the same men and practices.