Spanish Prime Minister Mariano Rajoy 

When is a bailout not a bailout? When it's a Spanish bailout, of course.

The Spanish Prime Minister, Mariano Rajoy, did his best on Sunday to portray the 100 billion bailout of his country's banking system by the European Union as anything but a bailout.   It was a win all round, he insisted -- a win for the euro, a win for the European Union and a win for Spain.

The bailout money coming from the EU would go directly into Spanish banks, he said, although he never once used the unspeakable word "bailout" in his press conference.   Instead of calling it a bailout, he said the funding being provided was a "credit line" for Spanish banks.

Because it was going directly into the banks, it would not be added to the Spanish national budget deficit. It would not involve any oversight by the EU or the European Central Bank or the IMF of Spain's budgets, state spending and fiscal policy. Only the banks would be under the EU microscope, not the state.
So it was completely different than the bailouts that Greece, Ireland and Portugal had been given. Completely different.  Not a bailout at all.

He may not have realized it, but the more insistent Senor Rajoy became, the more hilarious he sounded.   Manuel from Fawlty Towers would have been proud of his countryman.

In fact it was a performance that should win Senor Rajoy the Brian Cowen Fiscal Comedy of the Year Oscar.  He looked like Cowen in the weeks before Ireland was force-fed its bailout when he was still insisting that no bailout was being negotiated and that Ireland's economic sovereignty was completely safe.

Funny though the Spanish hubris was, no one here was laughing.  Ireland's best hope of an escape from a large part of our national debt was vanishing before our eyes.

There had been intense interest last weekend here in the Spanish bailout, because anything that Spain got in terms of better conditions or interest rates, we were going to demand as well.

In particular, if Spanish banks were going to be bailed out directly by the EU, we would want our banks to be directly funded by the EU as well.  

Instead of that, the Irish state had been forced to take the bailout money as a loan; the Irish state then gave the money to the banks so they could repay their debts and bondholders in full and recapitalize themselves. The enormous cost of this was then added to our national debt and is being carried by the Irish taxpayer through relentless cutbacks and tax hikes, the so-called austerity program.  

Was there a chance that Spain had done the impossible and that we were going to benefit as a result?
Watching Senor Rajoy being hilariously dogmatic, I had immediate doubts.  The details he provided of exactly how the EU is going to give the money to Spain were very sketchy.

One thing we do know is that the Spanish banks are up to their necks in bad property loans (just like Ireland) and are effectively bust.  It is clear they will never be able to pay back the bailout money they are being given.

So is the EU just going to wave goodbye to the funding?  The answer is no.

When Senor Rajoy finished his press conference on Sunday he flew off to Poland to watch Spain play Italy in the Euro 2012 soccer tournament.   While he was in the air, EU officials were already "clarifying" what was going to happen.

Yes, the bailout was going to the banks.  But it was being underwritten by the Spanish state, they said.   So if the banks default on their repayments, the Spanish taxpayer will be on the hook.

Just like Ireland, in fact, a helpful German official put it bluntly.

And with that the hopes of Irish taxpayers for an escape from the burden of Ireland's banking debt were sunk.    

It's true that Spain appears to have got something, but it's mainly a gloss aimed at avoiding the public humiliation of Europe's fourth largest economy.

The main thing is that the IMF is not providing the funds, so it's not an IMF bailout. The funds will come either from the euro zone's temporary rescue fund, the EFSF, or the new permanent rescue mechanism for countries in trouble, the ESM, which is due to start next month.  It's an indication of how unclear all this is that we don't even know which it will be.

The Spanish made a big deal out of the fact that the IMF is not providing the money.  The oversight by the EU and the ECB would only be of the Spanish banks (avoiding the humiliation we go through every three months when the EU/ECB/IMF troika come to Dublin to examine the state's books and basically tell us what we should do).

The IMF was not directly involved because the money was coming from the EU, the EU officials explained. However, they said that the EU had invited the IMF to help them in monitoring Spain's banks.  Which is not the kind of thing that the Spanish prime minister wants to hear at all.

The other big difference is that the 100 billion bailout for Spain is to solve their banking crisis.  No money is being given to the Spanish state to get it through its fiscal crisis, with huge budget deficits as it tries to grapple with a double-dip recession and unemployment at 24%.  

The hope was that shoring up the Spanish banks would allow the Spanish state to go on borrowing on the money markets at sustainable rates.   Sadly, that is not happening, with the interest rate being sought on Spanish bonds back up around 6%.

What this means is that Spain is unlikely to be able to continue very long without needing an injection of funding into the state to avoid a collapse.  It won't be as bad as Greece, but it's similar to Ireland and Portugal.  

There won't be any avoiding the bailout word then, or the involvement of the IMF.
Adding to the pressure on the Spanish state is the fact that the 100 billion euro bank bailout funding now being put in place is being underwritten by the Spanish state, according to EU officials.

Ultimately that means the state carries the can for the bank bailout loans if the banks cannot service them. Given the state of the Spanish banks, that's an accident waiting to happen.

There is another unexplained problem ahead for Spain.  The new ESM fund, which will have pledges from all the EU countries, is different from the temporary EFSF, the temporary fund used to help Greece.
Bailout money from the ESM will be treated as senior debt, first in line for repayment if anything goes wrong.

So if the Spanish bank bailout money comes from the ESM, existing and future commercial lenders to the Spanish government will rank behind euro zone governments if Spain is unable to repay all its debts in full.    

The money markets will not like this, and the effect will be to make it even more expensive for Spain to borrow from the markets in the future.  Which would hasten the day when Spain will need a full bailout and will no longer be able to pretend that it is different from Ireland or Portugal.  

So we can't look to Spain for hope.  But eventually some solution will have to be found to all this by the EU, other than loading the cost of the banking collapse on to the shoulders of ordinary citizens in countries like

Spain and Ireland where there was  a massive property bubble. The European Central Bank and the EU did nothing about it when it was happening so they can't escape the consequences either.