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Ambrose Evans-Pritchard: Don't be fooled, Spain has blinked ... and Germany has prevailed yet again


German Chancellor Angela Merkel

German Chancellor Angela Merkel

German Chancellor Angela Merkel

IT would be unkind to say that Spain has capitulated, but that is almost certainly what has happened. There will be a sovereign bail-out for Spain from the EFSF rescue fund. This is disguised (very slightly) by paying the money into Spain's state restructuring fund for banks FROB rather than the treasury, but that changes little.

It is the Spanish state that will bear the costs of recapitalising the banks, not the EU. Spain's public debt will shoot higher.

The Spanish press understands this perfectly well, as made clear this morning by Bernardo de Miguel in Cinco Dias.

"Berlín solo accede a un restate à la banca queue implique al Gobierno español"

Germany has not blinked at all. It has refused to mutualise EU bank debt. Nothing has changed. We are not one inch closer to eurobonds or debt pooling or any form of fiscal union.

All Germany has agreed to do is treat this as a precautionary credit line for Spain with less draconian strings attached than for Greece, Ireland, and Portugal, but how could this be otherwise? Spain is not the sort of country you can push around lightly.

Premier Mariano Rajoy has made a fine mess of affairs. Just a week ago he gave a categorical pledge that Spain would not need an outside rescue.

His ministers are now giving yet another hostage to fortune by suggesting that a mini bail-out will do the job. The mooted sums of less that €40bn are far too low.

Once the EFSF starts lending to Spain it will subordinate other creditors 'a la Grecque'. Who will buy Spanish debt in such circumstances?

Any bail-out has to be overwhelming once started. That of course creates its own huge problems. Eric Dor from IESEG School of Management in Lille says that Italy's share of the EFSF guarantees will rise from 19pc to 22pc once Spain steps out (since it does not fund its own rescue), and Germany's share will rise from 29pc to 33pc. You see the difficulty.

"The credibility of the guarantees given to EFSF bonds would collapse," he said.

The great game may yet change if Chancellor Merkel agrees to reconsider the European Redemption Pact proposed by Germany's Five Wise Men. That would be real mutualization at last.

There is no hard confirmation of this yet, and the author of the report was very gloomy about the prospects when I spoke to him last week. I cannot yet confirm that the Kanzerlamt is indeed changing its view, though there have been such suggestions in the German media.

As for Spain, the country has been more sinned against than sinner in the last eighteen months of this crisis, and perhaps before.

It was pushed over a cliff by completely unjustifiable ECB tightening last year, and by the EU's contractionary mix for the whole region.

Spain did not violate the Maastricth Treaty. It never conformed to the bogus Merkel-Schauble morality tale of fiscal excess. It had a primary budget surplus of 3pc of GDP in 2007.

(The UK had a 3pc deficit. The UK was the real sinner, but that is another story)

Spain was the victim of negative real interest rates in the middle of the last decade (minus 2pc for year after year) when the ECB committed its opposite error of loose money. It was flooded with cheap capital from northern Europe that was hard to control.

I don't wish to rehearse the pointless blame game. Spain obviously made huge mistakes as well. But sometimes you have to restate old points to restore a minimum of balance to the debate.

The whole eurozone was complicit in this. So were the EU authorities at every level, and so were French, German, British, and Dutch banks. So were the Asian central banks and wealth funds mopping up Club Med debt during the bubble.

This was a global debacle. Yet the reality is that Spain is being left to fend to for itself.