By Simon Miller
A full bailout of Spain could cost between €450bn (£351.5bn) and €650bn over three years but is economically impossible according to the think tank Open Europe.
In a briefing note, Open Europe said that to fully remove Spain from the financial markets for three years could total up to €650bn.
However, it added: “This is economically impossible as the combined lending capacity of the European Financial Stability Facility and the European Stability Mechanism, the eurozone’s two bailout funds, will only total €345bn in 2012.
It is also politically very difficult as taxpayers in northern Europe would oppose it and Spain would resist a highly prescriptive EU-led austerity programme.”
In addition, if Spanish regions continued to rely on the central government to finance them, this could add another €20bn to Spain’s funding needs.
Although a relatively small amount equivalent to around 2% of Spanish GDP, the main concern with the regions was the continuing damage to confidence caused by Madrid not being able to rein in spending and exert political control, the think tank said.
Of the 17 regions, Open Europe estimated that seven had unattainable deficit reduction targets this year, as they are expected to make cuts worth over 2.5% of their GDP.
“Some of the larger regions have significant amounts of debt to roll over this year. Catalonia, for instance, must refinance over €5.7bn in maturing debt before the end of the year,” the report said.
Open Europe’s head of Economic Research, Raoul Ruparel, said: "The regions will not make or break Spain financially, but their bailout requests show how politically difficult it will be for Spain to rein in spending and reform. The current bank rescue plan is clearly insufficient, while a full bailout - which could be in the region of €650bn - is impossible."
He added: "Instead, a third way has to be found, probably involving another bout of European Central Bank liquidity. However, this will also involve a series of risks, including strengthening the dangerous link between the Spanish state and banks."
The think tank also said the UK had the fifth largest exposure to Spain at €70bn thanks to its financial sector links while Spanish financial sector exposure stands at €343bn.
However, despite the high figures it is the indirect exposure that the UK has with Spain that is probably the bigger issue said Open Europe.
With France and Germany having a joint exposure of around €465bn to Spain, “any contagion effect from Spain could affect the UK through this avenue”.
The paper said that the UK government had long insisted that it will no longer be taking part in eurozone bailouts, outside of its International Monetary Fund (IMF) commitments and the use of remaining funds in the European Financial Stability Mechanism (EFSM) – which has around €11.5bn left in total.
“This is likely to hold, but there is a chance that the UK will come under greater pressure to help out Spain given the perceived financial links between the two countries,” the think tank wrote.
It continued: “In all likelihood though, the case for a direct UK contribution to the Spanish bailout will fall on deaf ears – and rightly so. Any UK share would come through the IMF or the EFSM, the latter of which would maximum total €1.58bn. The government would oppose the use of the EFSM, although it could be outvoted.
"Furthermore, the IMF may also be hesitant for further engagement in eurozone bailouts but may have little choice given the size of Spain.”