An offer Rajoy couldn’t refuse: EU agrees to Spanish bailout
Spain said it would accept the generous offer, but refrained from providing an exact sum of its needs until after two independent consultancies – Oliver Wyman and Roland Berger – finish their audit of the country's banking sector next week.
“The Spanish government states its intention to request European financing for the recapitalization of banks that need it,” Spanish Economy Minister Luis De Guinos told a press conference.
He noted that Spain would request money that was sufficient for recapitalization, plus a safety margin that would be “significant.”
De Guinos also stressed that the money would be going to the finance sector only, and would hence not be conditional on the government implementing new austerity measures.
The money is to be fed directly into the Fund for Orderly Bank Restructuring (FROB), a special fund that Spain set up to recapitalize its banks. Although the loaned funds will then make their way to private banks, the Spanish government will ultimately be responsible for it. The source of the money is yet to be decided, with many preferring for it to originate from the European Stability Mechanism (ESM) due to be launched next month.
Europe and America welcomed the deal.
French Finance Minister Pierre Moscovici stated that the agreement would “contribute to restoring confidence in the eurozone.”
“The accord announced tonight speaks to a reinforced solidarity among the countries of the eurozone and to their resolute desire to ensure its stability,” he added.
US Treasury Secretary Timothy Geithner described the offer and Spain’s decision to accept as “important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.”
Surprisingly, the unstinting proposal is somewhat of a snag for Spanish Prime Minister Mariano Rajoy, who has been insisting that his country’s banks would not need a bailout. He has adopted a number of austerity measures to get the country’s deficit to under three per cent of GDP as per the EU’s guidelines, since he came into office last November.
Spain is to become the eurozone’s fourth country to ask for a rescue package, following in the footsteps of Greece, Ireland and Portugal, though it is to come without the onerous preconditions of the antecedents.
Spanish banks are struggling with toxic real estate loans and assets. The Bank of Spain says theirs total 180 billion euro, while nationalized lender Bankia, SA has about 32 billion euro in toxic assets. Several other banks are also prime candidates for bailouts.
Skyrocketing lending costs have made it increasingly difficult for the government to help its banks, and it has become evident that it would not be able to salvage the banks without asking for assistance. Fitch’s recent three-notch downgrade of Spain was symptomatic of the dire situation the country is in.
Crisis strategist Gonzalo Lira believes the EU simply wants to trick markets into thinking Europe can salvage Spain. In reality, however, that may not turn out to be the case.
“I think the markets are going to realize very quickly that this is a smoke screen,” Lira told RT. “I personally don’t think that this 100-billion euro bailout will just be forked over to Spain’s banks. And even if it will be, it will have so many strings that for all intents and purposes it won’t be really any kind of handout. It will be some sort of pan-European nationalization of the Spanish banking sector.”
He said the decision was a face-saving measure ahead of Greece’s parliamentary elections.
“I think all of this is really a reaction to what is going on in Greece because on June 17, Greece is going to have parliamentary elections, and it looks very likely that the Greek people will vote against any kind of further austerity measures,” he noted. “So I think the European powers, the European Commission, the IMF and the European Central Bank are trying to come up with a way to save face and protect Spain from what they perceive is going to be the great disaster of next Sunday.”