The Spanish Rescue Plan That Won't

Euro-rescue proposals are getting bolder as the locus of the Euro crisis shifts from Greece to Spain:

The most serious danger to the euro is that Spain would be forced to ask for a full financial bailout. While the Eurozone might have just enough resources to finance a full-fledged adjustment programme with Spain, no money would be left to help another country. This would fuel alarm on financial markets because of a perception that Italy would follow if Spain falls. In other words, rather than calming markets, a bailout of Spain would bring the Eurozone even closer to the breakup point if it were not encompassed within a global and ambitious response to the market concerns.

A solution to eliminate any concern regarding the financial resources available to help Spain and Italy would be to remove the maximum lending volume of the European Stability Mechanism (ESM), which has been set at €500 billion, and to grant it a banking license. These new provisions would allow the ESM to borrow on the capital markets a multiple of its subscribed capital (€700 billion) and have access to ECB re-financing, thereby enabling the ESM to get the resources needed to participate in a bailout plan for Spain and Italy.