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News - 10 June 2012
Irish Taoiseach Enda Kenny; spitting tacks?

If I was the Irish PM, I’d be spitting tacks about the Spanish bank bailout; and back in the UK there won’t be another round of quantitative easing because it wouldn’t make a damned bit of difference!

If Spanish banks are to receive a no-strings attached €100bn EU bailout, the Irish government must be asking why they had to undergo the pain of EU imposed national austerity for the same sin. Although, ironically and unlike Ireland, it may make Spain weaker rather than stronger.

Despite the Spanish finance minister’s joy that apparently ‘with one bound they are free’, the bailout may not prove to be a ‘no-strings attached’ affair because the exact details are not out in the open especially the source of the funds that are going to recapitalise basket-case institutions like the nationalised Bankia.

As the BBC’s Robert Peston points out in his excellent blog; a lot depends on whether is comes from the outgoing European Financial Stability Facility [EFSF] or the incoming European Stability Mechanism [ESM]. Basically if Spain defaults on its debts at some point in the future the EFSF gets in the queue along with everyone else that has lent money. If the bailout funds are coming from the ESM, they have first call on whatever the country can manage to scrape together to repay creditors. So if it is the latter [and the rules would have to be bent if it is because at the moment the ESM can only lend to sovereigns] it is hardly a comfort to other lenders to know that they are likely to be even further back in the queue and, as Peston points out, “an ESM bailout would classify Spain as a second-class borrower in a formal sense and actually delay its rehabilitation”.

Of course the ESM could be granted a banking licence with theoretically limitless powers to lend to Spain, Italy, Portugal and anyone else who needed it in any quantity. But that's against EU rules.

Meanwhile in the UK, the Bank of England’s Monetary Policy Committee decided last week to keep interest rates on hold and not to add to the £325bn Quantitative Easing [QE] programme with another £50bn dollop. The reasons won’t be known until the minutes of the meeting are released but there is every possibility that they simply realised that it wouldn’t make any difference.

With the Eurozone lurching from crisis to farce and back to crisis, Germany playing chicken with its southern neighbours, Greece in danger of serious civil unrest, China struggling to keep control of its economy in the light of failing global markets and America’s recovery limping to a halt, the MPC seem to have decided that giving UK banks another £50bn to lock up in their vaults is probably futile.

As somebody said, “this is the new normal, get used to it”.

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