Spain asked the Eurozone for a bailout of up to €100-billion to rescue its banks. This is just a short-term fix for the troubled Eurozone because it doesn’t address the underlying problems in the monetary union. The earlier bailouts of Greece, Ireland and Portugal didn’t resolve the problems either. “The Spanish banking bailout is big enough for some shock and awe (€100-billion vs. talk of €40-billion) but details are murky,” said Kit Juckes, the chief of foreign exchange at Société Générale.
Still unanswered are who shares the burden, and just how much will Spain be limited in terms of talks over its debt troubles. It’s crucial to keep in mind that in Spain, it’s currently a banking crisis. “And where is the growth coming from to make the problems go away?” Juckes said. “The Spanish bailout doesn’t solve Europe’s woes…but maybe it allows the rest of the world to focus on something else.” There are many other questions, said Adam Cole of RBC in London. Which bailout will fund the rescue? How much will the final rescue total? What will the ratings agencies do? What terms will be attached to the funds? “The International Monetary Fund’s (IMF) report concluded Spanish banks would need at least €37-billion,” Cole said, noting that the maximum of €100-billion is perceived as credible. In terms of the ratings agencies, Cole said that “the loans will add directly to the Spanish government’s liabilities and so increase the debt-to-GDP ratio by around 10 per cent, leaving further downgrades likely.”
Spain’s bailout plan is seen as a robust answer to critics who accused European Union (EU) leaders of reacting too slowly, too late and with the least possible amount of cash while the crisis is spinning out of control. “This is a very clear signal to the markets, to the public, that the Eurozone is ready to take determined action,” Olli Rehn, the EU’s top economic official, said. “This is pre-emptive action.”
Instead of waiting for Spain to complete stress tests on its banks later, Eurozone officials agreed to move before the market turmoil that Greece’s upcoming elections may produce. Rather than undershooting estimates of Spanish bank needs, they have been generous: the International Monetary Fund estimated a requirement of at least €40 billion, but the Eurozone agreed to provide at least €100 billion. “We deliberately wanted to ensure there is some additional safety margin,” Rehn said. “This is the first time Europe is willing and able to deal confidently and overwhelmingly with (such) a large contingency,” said an unidentified Eurozone diplomat. “And all through a straightforward telephone conference. No all-nighters, no devising new instruments in a panic, and no penny-pinching haggling over money.”
The bad news is that Prime Minister Mariano Rajoy’s request for a bailout for Spain’s banks may undermine his political authority and credibility in financial markets. “The emperor’s clothes are tattered,” Simon Maughan, financial strategist at Olivetree Securities Ltd., said. “Unless he uses this money to attack the regions and control the failed cajas, what threads he has left will be stripped off him.” Rajoy has to persuade the Spanish people to accept austerity, and convince bond investors the cuts will deliver the deficit goals he has pledged. if he fails, he may have to return for a larger rescue, potentially draining the Eurozone’s financial ammunition.
“Clearly his domestic credibility will have been hampered by this U-turn but at least he is partially recognizing the depth of the problem,” said Stuart Thomson, a fixed income fund manager at Ignis Asset Management, who predicts another bailout, this time for the government itself, within the next year and a half. “This bailout is predicated on a return to growth next year and we don’t think that’s possible.”
Protestors demanded to know why billions would prop up broken Spanish banks, instead of helping people who are suffering financially. According to Moody Analytic’s Mark Zandi, the reason why Spain is in so much trouble may sound familiar to Americans. “Spain had a bigger housing boom and bust than we had here in the United States and that means a lot of bad mortgage loans bad real estate loans that undermined the capital positions of the banks. They are broke, they need help from the European Union,” Zandi said. “The Spanish must be very humiliated by having to take the aid. For them to actually have to go to the European Union for help like this, I’m sure was very difficult.” But the pain runs deep with 25 percent of Spaniards is out of work; among the young, unemployment is upward of 50 percent.
Prime Minister Rajoy warned that Spain’s economy, Europe’s fourth-largest, will get worse before it gets better. ‘‘This year is going to be a bad one,’’ he said. ‘‘By no means is this a solution,’’ said Adam Parker, of Morgan Stanley. Spain’s aid ‘‘could be a near-term positive from a trading standpoint, but you haven’t solved anything in the long term.’’
European leaders must prove to the world that they are making a credible effort to repair flaws in the Eurozone that allowed the problems in Greece to threaten the world economy. If Greek voters elect a government that is willing to live up to the terms of its €130 billion bailout by meeting its payments and narrows its enormous budget gap, strong doubts remain whether new leadership can fulfill those obligations. A significant amount of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country deeper in the hole. ‘‘Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program,’’ said Jurgen Stark, a former member of the European Central Bank’s executive board. ‘‘Who has the competence to implement the program? That is the key point.’’
Catalina Parada is an International, Marketing Consultant and Alter NOW’s Madrid correspondent. She can be reached at firstname.lastname@example.org.
Tags: bailout, Bank stress tests, banking crisis, European Central Bank, European Union, Eurozone, GDP, Greece, Greek elections, housing boom, housing bust, International Monetary Fund, Ireland, Mark Zandi, Moody Analytics, Portugal, Prime Minister Mariano Rajoy, Spain