What Spanish banks' crisis means for us
Q: Why are the Spanish banks in trouble?
A: For the same reason as our own banks -- bad property loans. Like Ireland, Spain gorged on an inflow of cheap credit from elsewhere in eurozone. As in this country, this money was lent by the Spanish banks to a booming property market. Now the bubble has burst, leaving Spain with over one million unsold houses and apartments, the equivalent of four years' normal demand.
Q: How big is the hole in the Spanish banks' balance sheets?
A: If the experience of Bankia, Spain's fourth-largest lender which was nationalised last month, is any guide, then very large indeed.
When the Spanish government pumped €4.5bn into Bankia a month ago it loudly assured all and sundry that this would be enough to fix the problem.
Four weeks later and the cost of sorting out the Bankia mess has risen to €23.5bn.
Investors are now terrified that many of the other Spanish banks are also nursing large, undisclosed losses.
The share prices of Santander and BBVA, by far the strongest of the Spanish banks, have fallen by more than 40pc over the past year. The situation at some of the other Spanish banks is far, far worse.
Brussels-based think-tank, the Centre for European Policy Studies, has estimated that the Spanish banks will have to write off €270bn on bad property loans.
If this estimate turns out to be correct, then it places Spain slap bang in the middle of bailout territory.
Q: So will there be a Spanish bailout?
A: At the moment it isn't even certain that there will be a Spanish bailout. Spanish prime minister Mariano Rajoy is insisting that, instead of forcing Spain into an Irish-style bailout, the ESM, the EU's new bailout fund, should put money directly into the banks. This would of course keep the costs of bailing out the banks off the balance sheet of the Spanish sovereign.
Unfortunately, Germany is having none of it.
It reckons, probably correctly, that the ESM, basically Germany, has a far better chance of getting its money back if it lends to the Spanish sovereign by way of a bailout, rather than putting the money directly into dodgy Spanish banks.
The result is an extremely dangerous game of financial chicken. Both Germany and Spain are betting that the other side will blink first.
While the odds must be on Germany winning this face-off, don't bet on it. If Mr Rajoy is backed into a corner, will he press the nuclear button?
As the fourth-largest economy in the eurozone, a Spanish banking collapse and probable departure from the euro would almost certainly set off a chain-reaction that would topple the entire single currency project. Is German chancellor Angela Merkel prepared to call Mr Rajoy's bluff? And what happens if he isn't bluffing?
Q: How big will a Spanish bailout be?
A: If there is to be a Spanish bailout, it will have to be very big indeed. Already the financial analysts are speculating about figures running into several hundreds of billions of euro. Even at this early stage it is clear that, if the funds can be found, a Spanish bailout will be bigger than the previous Greek, Irish and Portuguese bailouts combined.
Q: What does all of this mean for us?
A: Quite a lot actually. The manner in which the ECB strong-armed this country into shouldering the full burden of the Irish banks' losses, a policy which has already cost taxpayers more than €63bn, still rankles. In fact, it is the burden of these bank debts that is the main obstacle to Ireland returning to the bond markets as scheduled next year.
A deal which saw the ESM take on board at least some of the Spanish banks' losses could provide the Government with the opening it needs in its ongoing campaign to renegotiate the unfair deal on bank losses, which we were forced to accept in the autumn of 2010. It has been speculated that a Spanish-style deal on the banks would allow the Irish Government to offload up to €43bn in bank-related debt from its books and dump it on to the ESM instead.
Q: It all sounds great but what are the chances of any of this actually happening?
A: That, literally, is the €64bn question. Will Germany buckle and allow the ESM to pump money directly into the Spanish banks? So far there has been absolutely no sign of any German willingness to do so. Germany has also poured cold water on the possibility of a new deal on Irish bank losses, with a spokesperson saying that this would send a "negative signal" to the markets.
In practice, the best we can probably hope for is a series of incremental deals which gradually reduce the burden of bank debt rather than a single agreement that solves the problem overnight.