Is the Spanish Bank Bailout Good for the Euro?

With the recent approval by European Union leaders on a $52 billion bailout package for Spain’s most troubled banks, the fundamental picture has improved a bit for the single currency. And, although only taking place regionally, the recent announcement is welcomed news globally amid still persistent concern over the fiscal downfall of Europe.

What’s in the Bailout?

The release of $52 billion in aid didn’t come cheap for a group of banks that represent about 20% of the overall country’s banking system. In exchange for the disbursement, the smallest banking institution – Banco de Valencia – will be sold to Caixabank, while the others will work towards reducing their balance sheets by more than 60% over the next five years. This will include a transfer of approximately $59 billion in bad property debt to a commissioned “bad bank”. All in all, the bailout paves the way for the troubled banks to remain solvent while working towards shoring up good assets.

Still No Official Bailout

The bank bailout is a boon for Spanish Prime Minister Mariano Rajoy. The country’s elected leader has been committed to remaining bailout free since this past summer, and by the looks of the financial system bailout he will likely stay the course. Incidentally, recent events have backed previous notions that PM Rajoy will be unwilling to ask for an official bailout from the European Central Bank or European Union leaders unless pressed to do so by rising debt costs.

Spanish 10-year benchmark bonds have declined as global investors become more optimistic over the recovery prospects of the country. In afternoon trading Spanish benchmark bond yields declined 19 basis point to 5.33% - down from near 6% in the middle of the month.

Euro Support

News of the bank bailout should bolster some support for the single currency in the near term, given the fact that a resolution regarding a troubled European banking system has surfaced. Nonetheless, the single currency is still being held lower on failed expectations of the recent Greek debt decision and lingering indecision over the US fiscal cliff. Look for the consolidative vibes to clear as we head into the US GDP report scheduled for tomorrow.