Will This New ECB Rule Hurt Spain?

spain

Spain could be in more trouble, should a credit rating decide to find Spanish debt less lucrative than it currently is.

Earlier in the month, the European Central Bank adjusted its rules on the issuance of ‘haircuts’, or amnesties, that allow countries to offer up collateral in exchange for certain kinds funding from the bank. If the credit rating of a country dips below an A rating, the penalties become more severe.

In the case of Spain, one downgrade could result in 8 billion euros less in funding, for the 100 billion in government bonds given as collateral.

Avoiding this in Spain is going to be hard, where the economy is struggling, and unemployment is among the highest in the euro zone. Lending, a key driver of growth, remains weak from banks to businesses, and seasonal tourism is only temporarily propping up the Spanish economy.

The political scene also remains dubious in Spain, where Prime Minister Mariano Rajoy took a political gamble in claiming that a recovery was at hand — something that, if true, was unlikely to be felt by voters, as an end to a recession isn’t exactly the same as a robust period of growth.

In a poll taken in June, 93.4 percent of Spaniards thought the economy was the same or worse than last year, and the country has nearly depleted half of the 100 billion euros allotted for its stabilization by the ECB. Most recently, Rajoy has been in the news for allegations of corruption, and amid calls for his resignation, is making an effort to endure the charges being made against him. Notably, Rajoy is accused of taking cash payments along with other members of his party, and 83 percent of Spaniards believe the allegations are true.

Political risk certainly factors into the decisions made by credit rating agencies on countries’ economic health, and with governing becoming an increasingly tall task for Rajoy in Spain, the risk associated with sovereign debt from his country could be seen as greater. If that ends up being the case, an already burdened Spanish government would either end up having to stake more for ECB money, or else force the ECB to reevaluate the situation.

Outside of the political sphere, growth remains hindered by the lack of lending, where banks are not only faced with the remnants of a collapsed property bubble, but must deal with soft demand amid an economy thirsty for life.

Moreover, capital requirements throughout Europe are making life harder for banks. As lenders hold more and more equity against their risk, their tolerance for lending in places like Spain could continue to deteriorate. The International Monetary Fund has called on banks to stick shareholders with lower dividends, in order to raise capital to both lend and comply with capital requirements.

The fear is that unless something is done, banks will continue to delay economic expansion.

Don’t Miss: 5 Hard Truths About Saving for College and the Cost of Education.

More from The Cheat Sheet