There is no way to avoid Spain’s pain

It is not a good idea for the European Union to bail out Spain and its banks, but if it chooses to do so, then it must do a proper job of it. Various estimates put Spanish banks in need of anything between 60 and 100 billion euros (Dh459 billion). The yield on Spain’s 10-year bonds reached 6.088 per cent last week, making its debt burden increasingly unsustainable and unaffordable for it to raise funds to assist its banks. When yields on their bonds reached seven per cent, Greece, Ireland and Portugal were forced to seek a bailout.

Rating agencies have also been warning about the ability of Spain to manage its debt and Fitch has cut the country’s credit rating to within two steps of junk.

Bailouts effectively make private debt a public responsibility. Those banks that lent irresponsibly must bear the financial consequence of their decisions. Countries that have unsustainable social security or economic development programmes must reprioritise their spending.

But, even now, many investors will put their money into risky European bonds because of the high yields they can secure. Based on past experience, they also have a reasonable expectation that the European authorities will step in and protect at least some of their investment if a country threatens to default. Germany is correct to resist making public money easily available for bailouts and insisting that any loans come with strict conditions attached to enforce fiscal discipline.

However, if there is to be any bailout of Spain, it must be sustainable and affordable by the country. The terms under which the debt must be serviced must take into account the country’s slowing growth rate and high unemployment. It must also take into account that any agreement has to be politically sustainable — there is no point in signing agreements with a government that is going to be removed from power by widespread popular resistance.

If this cannot be done, then Spain must be left to its fate in the financial markets — and the rest of the Eurozone, and the world, must brace for the inevitable contagion.