Well, that didn’t last long. Initial enthusiasm that Spain had agreed to a deal to prop up its ailing banks gave way almost immediately to the feeling that there were too many unanswered questions. More than a feeling: Moody’s Investors Service cut its rating on Spanish government debt on Wednesday by three notches to Baa3 from A3, declaring, according to Reuters, that the newly approved euro zone plan to help Spain’s banks will boost the country’s debt load.

With yields on Spanish 10-year bonds hitting euro-era highs of around 6.72% almost 50 basis points higher than on the Friday before the deal was announced confidence seems even lower than it was last week.

Robin Bew, editorial director with the Economist Intelligence Unit, says that the test of the bailout would be whether the government was able to maintain affordable access to capital markets. But as interest rates spike, it’s now obvious: “They’re up against it,” he says.

Or as Too Big to Fail author Andrew Ross Sorkin put it in The New York Times, “[The deal] was not enough. And it may never be enough. . . . Indeed, it now appears that the bailout could make things in Spain worse, not better.” 

Although the deal was welcomed at firstif only because it meant that the Spanish government was facing up to the scale of the problemdoubts soon began to surface:

The €100 billion ($125 billion) support package was perhaps €20 billion ($25 billion) more than most analysts and rating agencies believed was necessary, and some €60 billion ($75 billion) more than the International Monetary Fund had calculated, so they took comfort from the extra safety cushion. But stress tests have yet to be completed on the banks and won’t be until later this month. Bew believes, moreover, that the IMF estimate “looks very low.”

Neither was it clear who was lending the money: if it’s from the European Financial Stability Facility (EFSF), then the new funding ranks pari passu with other loans. But the EFSF is essentially giving way to a new entity, the European Stability Mechanism (ESM), whose loans will outrank those of other creditors. Finland’s finance minister has said that if the loan comes from the EFSF, then it will ask for collateral. Deutsche Bank said in a research note that the parliaments of countries such as Germany and Finland would have to approve the new loan. One further problem: the ESM, which might be responsible for extending the bailout finance, hasn’t itself been formally ratified yet by a number of national parliaments, including the Bundestag.

The likely terms attaching to the loan are “condition-lite,” according to the Economist Intelligence Unit, and will only apply to the banks themselves, even though the government will bear ultimate responsibility, increasing public debt by some 9%.

Probably, too, the markets remember that the Spanish finance ministry declared last September that the country’s banking system was “prepared to overcome any test it might face in the future.” At the time, Bankia, formed two years ago from the more or less forced merger of seven savings banks or cajas, had just raised money from investors. It now reportedly needs almost €20 billion ($25 billion).

There is no certainty that the finance ministry has got it right this time. Standard Chartered chief economist Gerard Lyons reacted to Prime Minister Mariano Rajoy’s comments, “If Spain’s PM thinks a €100 billion bailout is a ‘victory,’ he probably also thinks Spain beat Italy in football yesterday. Reality check needed.” (For those who don’t follow the Euro 2012 football championship, the score was a 1-1 draw.)

But the real question is, is this deal actually going to work? Even before the outline of the deal was made public, economist  Megan Greene, director of European economics at Roubini Global Economics, wrote in her own blog that a bailout was unlikely to succeed. She argued that depositors were withdrawing money from some banks (more of a bank “jog” than a “run,” admittedly), especially in Greece, because of fears that accounts would be redenominated in a new and sharply-devaluing currency. “A bailout for Spanish banks is very unlikely to allay these concerns,” she wrote.

But there’s one thing that’s even worse than a plan that doesn’t work, and that’s a plan that makes things worse. The stress tests could be particularly problematic, wrote Greene: “If the underlying assumptions in the independent stress tests involve years of recession and a further 20% fall in the property market as the base case, then they may be credible.”

Greene added, however: “There is a chance that, as with the independent stress tests done on Irish banks by Blackrock, the underlying assumptions for the stressed case actually become reality and further bank recapitalizations seem necessary.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.

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