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.
As the government reluctantly made it clear that an application was imminent, European officials were instructed to set up a teleconference for euro zone finance ministers on Saturday afternoon. Before the ministers themselves spoke, top finance ministry officials from euro countries held a separate teleconference on Saturday morning.
The ministers’ meeting started at about 4pm in Brussels, one hour ahead of Irish time. Silence followed. Almost four hours would pass before Spanish economy minister Luis de Guindos told a press conference in Madrid the government would be making a request for aid. “The Spanish government declares its intention of seeking European financing for the recapitalisation of the Spanish banks that need it.”
And so it was in the third summer of the debt crisis that a fourth country sought help. At the very outset of the debacle, Spain was always perceived to be next in the line of fire after Greece. Many official observers believed Spain – not Ireland – would be the second aid claimant.
However, Rajoy’s socialist predecessor José Luis Zapatero managed to evade the flames. While Zapatero set about a swingeing austerity plan, the problem in the banks festered and grew worse as recession intensified and unemployment ballooned. Zapatero called an early election for the autumn and did not himself seek to return to office.
Spain already needed a lifeline by the time Rajoy took charge. The banks are known to have used their proceeds from the ECB’s €1 trillion emergency three-year loan operation to buy up its sovereign bonds. Once that money ran out, the situation soon reached breaking point.
This bailout is different, however. There will be no IMF money and the loans are for the banks specifically. As a result, the policy conditionality is largely limited to the financial sector.
Spain must still adhere to a difficult austerity plan but troika inspectors will not be breathing down the necks of government ministers.
It is but a small reprieve.
The struggle for investor confidence now enters a decisive new phase.
€100bnSpain’s bailout package, approved on Saturday
€78bnPortugal’s bailout, approved in May 2011
€67.5bnIreland’s bailout, approved in November 2010
€240bnGreece’s bailouts – €110 billion was approved in May 2010 and €130 billion was approved in March this year
5thThe Spanish economy’s ranking in size in comparison with the other EU economies
12thThe Spanish economy’s ranking in size in comparison with world economies
24.4%Spain’s unemployment rate
51.5%Spain’s youth unemployment rate
21.7%The fall in Spanish house prices since 2007