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Spain hasn’t fully taken care of its struggling banking system, but a potential solution is already eyed by Ireland, who got a bailout (austerity included) due to its banks.

Ireland, which is marked as a potential victim from the Greek exit of the euro, could demand changes to a bigger domino: Spain.

Spain and Ireland followed almost the same path

Ireland and Spain have a similar general story with 8 similarities. Both partied on the low interest rates of the ECB in the middle of the previous decade. Both had a boom in real estate, that was followed by a bust. Both have problematic banking systems, that aren’t the world’s most transparent ones when coming to acknowledge losses.

Ireland took over its banks, nationalized them and found itself with huge debt. The EU and the IMF “bailed out” Ireland, together with some help from the severe austerity measures imposed on the Irish people.

Many in Ireland already want to “bail out of the bailout“, as EU funds are transferred to Ireland, which transfers them to banks, which transfers them to European banks.

Three Options for Spain

  1. Going Irish: Spain didn’t go fully “Irish”.  Spain has nationalized some banks, and this puts pressure on the sovereign. Spain’s bond yields are around 6.20%, with spreads to German bunds close to 5%.
  2. Going Icelandic: Another option, that Spanish demonstrators call for, is the Icelandic option: letting the banks fall. But this isn’t on the cards.
  3. New -Letting the EU Save the Banks: The permanent European bailout mechanism, ESM is due to get into full gear during the summer. This “firewall” can’t borrow to banks at the moments, only sovereigns. Spain wants it to borrow to banks, as saying – you want to save them – Do It Yourself.

The ESM option receives support also from the IMF: Christine Lagarde, the managing director, said it loud and clear.

Ireland’s finance minister Michael Noonan  now eyes this option as well, saying the Ireland will watch with “great interest” the developments on Spanish banks.

Ireland would certainly enjoy some debt reduction in the form of a direct EU bailout for banks, not involving the Irish sovereign and providing some relief from austerity.

Austerity Backlash

This adds to the austerity backlash that the German led policy is suffering from Рa backlash led by the new French president Fran̤ios Hollande, and also seen in the rising popularity of the anti Рbailout Greek parties towards a second round of elections.

If the Irish bailout program comes into question, it will add more pressure on the pressured euro.

For more on the common currency, see the euro usd forecast.