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Spain's biggest hurdle to a bank recovery: public distrust

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Mrs. Ramos is correct. A bank run is unlikely, for now, precisely because the consequences would be global. Europe does not have the money to rescue Spain, an almost-certain scenario if its financial sector implodes.

Paymaster Germany, under pressure from its European partners and other global powers, including the US and China, signaled this week that it is willing to accept a bailout limited to Spain’s banks (as opposed to the country, as was the case with Greece, Ireland, and Portugal). Spain can officially request a bailout this weekend, according to Spanish media and Reuters quoting unnamed sources today, although the government denied it had yet made a decision.

Spain’s plight is not over unsustainable debt levels or its unwillingness to implement the necessary reform to return to growth. The Spanish government already secured most of its credit obligations this year and a bond auction yesterday illustrated that investors are still interested in lending money to Spain, albeit at a higher interest rate.

Furthermore, the European Central Bank has enough firepower to preempt any Spanish bank collapse. “It is possible that people withdraw a lot of money, but banks with little collateral won’t go bust, because they could still go to the ECB,” said Janet Henry, London-based chief European economist with HSBC.

The exact terms of a Spanish bank bailout still have to be negotiated, and the amount will depend on independent bank audits, including one from the International Monetary Fund which will be made public on June 11.

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