JUDY WOODRUFF: Some analysis now of the latest effort and what was behind the urgency of it. It comes from Douglas Rediker. He represented the U.S. on the Executive Board of the International Monetary Fund from 2010 until the beginning of this year. He’s now a senior fellow at the New America Foundation. And Jacob Kirkegaard, who closely watches European matters for the Peterson Institute for International Economics.
And, gentlemen, we thank you both for being here.
JACOB KIRKEGAARD, research fellow, Peter G. Peterson Institute for International Economics: Thank you.
DOUGLAS REDIKER, senior fellow, New America Foundation: Thank you.
JUDY WOODRUFF: Jacob Kirkegaard, let me start with you. All of this stems from the collapse of the real estate bubble in Spain and the banks holding the bag, in essence.
JACOB KIRKEGAARD: Yes, basically.
I mean, what you have on a national scale in Spain is essentially what we have seen in some of the regions of the United States, in Nevada, South Florida, South California, where essentially you have an enormous increase in housing prices and a subsequent bust.
And the bust breaks the back of the banks. There needs to be a bailout. Unfortunately, the Spanish government has been in denial about the true state of its banks for pretty much since the crisis began. But you could say that finally they have run out of options. So what happened over the weekend was really the end of denial.
JUDY WOODRUFF: So, Douglas Rediker, what caused them to change their mind? Because as we just heard, they have been saying for days and days that this wasn’t necessary.
DOUGLAS REDIKER: Well, not just days and days. They have been saying it for a lot longer than that.
At the end of April, there was actually a report issued, a preliminary report, but a report nonetheless, by the IMF which gave their financial assessment of the financial sector of Spain. That highlighted the weakness of Bankia, which is one of the large banks.
And that set in motion a chain of events in which the government had to put money on the table to save Bankia. And that raised the entire specter of where was the money coming from, not just for Bankia, but for the broader financial system in Spain as a whole. And that’s really the step that led to what we saw this weekend.
JUDY WOODRUFF: So this — and yet, just to be clear, Jacob Kirkegaard, this is a bailout that’s different from what happened with Greece, with Portugal, with Ireland. Is that right? Explain how.
JACOB KIRKEGAARD: Yes.
Basically, I mean, some people have used the expression bailout-lite about this. And there’s some truth to that, because basically what this is, it’s a loan to the Spanish government with the intent of — it’s an earmark loan that basically goes towards the sole purpose of recapitalizing the Spanish banking system, which is quite unlike the three other bailouts or the traditional IMF bailout, where basically you finance all of the financing needs from the entire government, including deficits and everything else is covered by, you know, the IMF or the euro area combined.
This is not the case here. It’s solely for the purpose of recapitalizing the banks.
JUDY WOODRUFF: And, Douglas Rediker, how solid a deal is this seen? I saw a quote today from the Nobel Prize-winning economist Joseph Stiglitz who said this really isn’t going to work because the government is in essence bailing out the banks that have bailed out the government by buying government debt.
How do you see this?
DOUGLAS REDIKER: Well, that’s not the problem here, because that’s an issue that we have got which is a dynamic that has pervaded the entire European crisis for years.
That relationship between the banks and the sovereigns is one of the dynamics that needs to be broken. So the cycle being broken is actually. . .
JUDY WOODRUFF: Sovereigns being the. . .
DOUGLAS REDIKER: Sovereigns being the governments.
The problem is the first part of your question, which was, how solid is the deal? And that’s why I think the markets responded as they did today, because there are a lot of ambiguities and uncertainties here, not the least of which is, where is the money coming from and who is it going to and on what terms?
Most people would consider that to be a rather soft deal if those basic parameters are not yet defined.
JUDY WOODRUFF: Well, let’s take those questions one by one. Where is the money coming from? I will ask you that one.
DOUGLAS REDIKER: Well, it’s unclear yet.
The money is supposed to come from either of the EFSF, which is the established mechanism for the Europeans, the European Financial Stability Fund, or the ESM, the European Stability Mechanism, which doesn’t exist yet. It’s going to exist, assuming ratification, at the end of this month.
It’s actually a much more stable entity once it is ratified. But it isn’t in existence yet. And let’s be clear. It doesn’t have any money yet, because, of course, it doesn’t exist yet. It’s supposed to be funded by the European governments and the markets, a combination. But it hasn’t happened yet.
JUDY WOODRUFF: So, does that explain why the markets were less than confident today?
JACOB KIRKEGAARD: No — I think this has a lot to do with it.
But I think the bigger implementation risk is what Doug also mentioned, which is, where is the money going, because we still don’t know where precisely. We haven’t heard from the Spanish government or the independent auditors that they have hired to basically audit the Spanish banks how many — how much money needs to go to which bank and what are the conditions under which they would be injected into these banks.
Will existing shareholders be wiped out or not? What will happen? Will there we write-down of bank bondholders? All of these are details we don’t know.
JUDY WOODRUFF: So, why was this announced, Douglas Rediker, if they didn’t have all these details worked out? And know there’s the Greek election coming up this weekend.
DOUGLAS REDIKER: Well, I think we have seen over the last several years that the Europeans have done a very good job of rhetorically announcing things with details to follow.
So, even the EFSF or the ESM, those entities that are the big bailout mechanisms, they have been announced over the years in a very rhetorical way, with the bureaucrats and technocrats and central bankers and others to fill in the gaps later.
The markets want to see the European policy-makers come together and make a public commitment to do something real. Whether it actually turns out to be as real as they think is less important than actually showing that they can actually spend a weekend, come together, and make an announcement that appears to actually demonstrate some cohesive commitment.
So far they have done a pretty good job with that.
JUDY WOODRUFF: But at the same time, you’re saying, Jacob Kirkegaard, that there’s a less than complete confidence that the money, if it is found, if they can pull this money together from these entities we have been hearing about, that it’s going to be spent in the way that is needed.
DOUGLAS REDIKER: Yes.
No, I think the key issue here is that the Spanish government has lost all credibility in the financial markets. And they’re basically in my opinion quite worried that this is the same Spanish government that is going to be overseeing the disbursement of all this money to individual Spanish banks.
How is it going to be done? Are — the Spanish government going to look out for their political friends in some of the Spanish regions or not? There’s just a lot of uncertainty about that.
And then also coming back to your question about why did it happen now, I think a major reason was this significant pressure both by the European Central Bank, whom we should remember the Spanish government just a few weeks ago were trying to convince to buy their bonds so they wouldn’t have to take this more public bailout. There was a lot of pressure for them basically to get ahead of the Spanish — sorry — the Greek elections.
JUDY WOODRUFF: So, just to conclude, at this moment, what does one look for next to know whether is going to work or not?
DOUGLAS REDIKER: I think what you’re going to have to see is where is the money coming from? This sounds simple.
But where is the money really coming from? And who is going to actually receive it, and, more importantly, the third part, on what terms? Even today, we saw the finance minister of Spain basically say that this was very, very little in terms of conditionality, in terms of the terms.
And at the same time, an hour or two later, you heard the German finance minister say, uh-uh, we are looking for real conditionality that would be imposed by some combination of the European Central Bank, the European authorities, and the IMF. And that really remains an outstanding, uncertain term.
And I think it’s a pretty major one to be outstanding at this point.
JUDY WOODRUFF: More clarity needed.
DOUGLAS REDIKER: Indeed.
JUDY WOODRUFF: Thank you, both, Douglas Rediker, Jacob Kirkegaard.
JACOB KIRKEGAARD: Thank you.
JUDY WOODRUFF: We appreciate it.
JACOB KIRKEGAARD: Thank you.
DOUGLAS REDIKER: Thank you.
JUDY WOODRUFF: And you can find”NewsHour economics correspondent Paul Solman’s Pain in Spain tweets on his Making Sense page, including a viral version of the Lord’s Prayer.