Bank focus of Spain's bailout aims to please investors
ANALYSIS:After too long in denial, Madrid has sought aid as its dire straits need a firewall against Greece, writes ARTHUR BEESLEY
SPAIN’S EUROPEAN bailout is designed to isolate the country’s banking problem while limiting its drawdown of scarce rescue funding.
The overriding objective is ensure that Spain retains access to private debt markets for the state’s day-to-day needs, avoiding a full-blown bailout that could stretch the European Financial Stability Facility and European Stability Mechanism funds to the very limit.
Thus the response of markets in the coming days and weeks will be crucial. If the strategy is to succeed, Spain needs to see a rapid decline in its borrowing costs.
There is some confidence in Brussels that this will indeed happen. After all, it was primarily the banks that dragged Spain down in the first place. But the country is still in the throes of recession – and unemployment is at record levels. As the government seeks to regain the initiative, the task before it is an arduous one.
The country tried but failed to secure direct bailout aid for the banks, with the money staying off its national debt. Germany baulked at that notion, which might have opened the door for a similar deal for Ireland. It was not to be.
How things change. Prime minister Mariano Rajoy had insisted ever since he took office last December that his administration would be able to find a way through the storm without external aid.
But confidence in the country fell away last month when Bankia, a group of merged savings banks, disclosed that its property losses would necessitate a bailout exceeding €23 billion, €19 billion more than the original estimate.
This triggered anxiety that other banks would follow suit. Borrowing costs soared amid doubt over Madrid’s ability to pay an ever-expanding rescue bill.
Glowering in the backdrop is uncertainty over the situation in Greece. Ahead of a fateful rerun of its general election next Sunday, Spain faced the risk that it would be first to suffer if Greeks vote for anti-bailout parties and set their country on a course back to the drachma.
For Spain, this served to magnify the risks involved in doing nothing. In a sense the Spanish bailout can be seen as something of a “firewall” against the worst ravages of any Greek disaster.
By Wednesday of last week, the government had admitted it would need help. By Thursday, as results came in from an International Monetary Fund audit of the banks, preparations were set in motion for an aid application. It was already clear that the European Central Bank would not succumb to pressure to resume its bond-buying campaign.