Despite the bank bailout, investors believe that the country itself might still have to go begging, writes Giles Tremlett.
A bailout of up to €100-billion for Spain’s ailing banks failed to calm nerves about the future of the euro this week. There was confusion over the plan’s details and worries that Greek voters might choose to abandon the single currency.
The hurried bailout announcement, after an emergency video conference of eurozone finance ministers at the weekend, was meant to ease pressure on Spain and other troubled European economies before Sunday’s elections in Greece.
But Spain’s borrowing costs rose on Monday, nudging closer to levels that are considered unsustainable and that are dragging Italy towards the danger zone.
Investors are worried about uncertainty over the amount of bailout money Spain will take, the mechanism for providing it and the conditions attached to the deal.
“The size of the deal is meant to show a real commitment on the part of the eurozone to stabilise the system,” said Robert Pavlik, of Banyan Partners in Florida in the United States. “However, this just moves the problem down the road and shows how nervous the European Union is going into the Greek election.”
Spanish Prime Minister Mariano Rajoy’s triumphant approach to the bailout appeared to annoy Germany and other eurozone countries that must persuade sceptical voters that the money is well spent. As he tries to escape the devastating political price paid by other European leaders who have asked for bailouts, Rajoy has told Spaniards that the €100-billion comes with no strings attached except for the banks receiving the money. He refuses to call it a bailout.
But Germany’s finance minister, Wolfgang Schäuble, warned that, as with Greece, Portugal and Ireland, Spain must answer to the feared “troika” that enforces the debt repayment terms imposed on other bailed-out countries.
The troika is made up of the European Commission, the International Monetary Fund and the European Central Bank.
“The Spanish state is taking the loans, [so] Spain will be responsible for them,” Schäuble said. “There will likewise be a troika. There will, of course, be supervision to ensure that the programme is being complied with, but this refers only to the restructuring of the banks.”
“Of course, there will be conditions,” EU competition commissioner Joaquín Almunia said in a radio interview. “Whoever gives money never gives it away for free.”
The eurozone ministers who approved the deal warned they would watch Spain’s deficit-busting and reform programme carefully, but did not say whether loans would depend on Rajoy’s government hitting targets. Rajoy’s achievement in limiting the explicit conditions to Spain’s banks has been broadly welcomed in a country that believes the rest of its economy needs no international oversight.
But those countries already under troika control warned that they would demand a revision of their bailout terms if Spain received special treatment.
“We will be watching the process of the specific programme for Spain’s banking system closely,” Portuguese Prime Minister Pedro Passos Coelho said.
Irish Prime Minister Enda Kenny has already said that if Spain wins soft terms then these must be offered to others as well.
Those terms will not be clear until Spain formally requests a sum of money. It is not clear whether this would be provided by the European Financial Stability Facility or the new arrangement that replaces it in July, the European Stability Mechanism.
Problems are still there
Other European leaders admitted that the bailout decision had been taken to avert yet another moment of panic in Europe’s long-running debt crisis. “We have managed to avoid a major crisis but the problems are still there,” Finnish Prime Minister Jyrki Katainen told Reuters.
Investors are worried that the bailout is a temporary solution to Spain’s problems as it falls back into recession and battles with 24% unemployment.
“Call it what you like, but this is a bailout, the first, and only for banks, but most likely not the last for Spain,” said Oliver Burrows of Rabobank Credit Research in the Netherlands, who pointed to the amount of government debt held by Spanish banks. “We suspect that inevitably the Spanish government will have to seek its own bailout.”
The International Monetary Fund has said that Spain’s former savings banks and some of its medium-sized commercial banks would jointly need at least €40-billion.
The government has said it will wait for two independent auditors to produce valuations of Spain’s total bank assets before deciding how much money to ask for.
They will make their first reports by June 21 and government sources have already suggested they will be close to the International Monetary Fund figures.
Recently part-nationalised Bankia asked for €19-billion and officials have recognised that two other banks need €9-billion. But Spain’s government has twice underestimated the sums needed to rescue its banks this year, with two rounds of provisioning totalling €80-billion, and investors remain wary.
“Markets will certainly ask the question about whether a second bailout might be required and the margin for error between the sort of €40-billion the International Monetary Fund is saying and the €100-billion ceiling,” said Mark Miller of Capital Economics in London. – © Guardian News & Media 2012
Banking on sticking plaster
Jill Treanor asks and answers questions about Spain’s bailout
<strong>Is this a bailout of Spain?</strong>
Prime Minister Mariano Rajoy is determined to portray the €100-billion as a cash injection for Spain’s banks and not a bailout of his country. However, the funds are being made available because Spain cannot afford to prop up its banks with its existing resources and its cost of borrowing on the markets is too high to raise the funds.
<strong>Who is providing the €100-billion?</strong>
The cash-strapped eurozone nations themselves, although details are hazy as there are two bailout funds: the existing European Financial Stability Facility and the European Stability Mechanism, which launches next month. If Spain borrows money from the mechanism, it has to repay these loans ahead of its bond-holders, making the markets less willing to lend to Spain. The fund allows Spain to honour its own debts first.
<strong>How does the Spanish government get the money?</strong>
It will be handed to the government’s Fund for Orderly Bank Restructuring, which passes it on to the banks. But this does not insulate the public purse from the bailout as Spain’s public debt to gross domestic product ratio will rise from 68.5% to a potential 90%.
<strong>How does it differ from the rescue of Greece, Portugal and Ireland?</strong>
The money is coming from the euro area, not from the International Monetary Fund – which includes contributions from the United Kingdom — and it is just for banks.
<strong>Does this mean Spain will not be subjected to supervision from the so-called troika?</strong>
Spain reckons not. But the IMF and European Union think otherwise.
<strong>Where does this leave the eurozone?</strong>
Spain’s bank bailout is a sticking plaster and does nothing to solve the long-term issues about stronger fiscal union. – © Guardian News & Media 2012