Spain ate humble pie and became the fourth and largest country to ask Europe to rescue its failing banks.
EU leaders hope the loan of up to €100bn that Spain’s finance minister denied was a bailout, will stabilise a financial crisis that threatens to break apart the eurozone.
Yesterday’s rescue offer follows growing pressure from international investors and the Obama administration and comes a week before elections in Greece, whose voters could decide whether the country leaves the euro.
The Spanish acceptance of aid for its banks is a huge embarrassment for prime minister Mariano Rajoy, who insisted just 10 days ago that the banking sector would not need a bailout. He was elected in November and walked right into a hurricane.
Europe’s widening recession and financial crisis has hurt companies and investors around the world. Providing a financial lifeline to Spanish banks is likely to relieve anxiety on the Spanish economy – which is five times larger than Greece’s – and on markets concerned about the country’s ability to pay its way.
“What the markets are looking for is essentially the Spanish government’s acceptance that its banks are broke,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.
Spain’s economy minister Luis de Guindos announced the deal after an emergency conference call with eurozone financial leaders yesterday, but insisted it was financial aid, not a bailout.
He said the aid would go to the banking sector only and would not come with new austerity conditions attached for the economy in general – conditions that have been an integral part of previous bailouts to Portugal, Ireland and Greece.
The exact figure of the bailout has not yet been decided. Mr De Guindos said the country was waiting until independent audits of the country’s banking sector had been carried out before asking for a specific amount. The audits are expected by June 21 at the latest.
He did say, however, that Spain would request enough money for recapitalisation, plus a safety margin that would be “significant”.
With markets in turmoil, Mr de Guindos said the government’s efforts to shore up the financial sector “must be completed with the necessary resources to finance the needs of recapitalisation”.
Finance ministers of the 17 countries that use the euro said the money would be fed directly into a fund Spain set up to recapitalise its banks, but underscored that the Spanish government was ultimately responsible for the loan.
Still, that plan allows Spain to avoid making the onerous commitments that Greece, Ireland and Portugal were forced into when they sought their rescues.
Instead, the eurozone statement said that it expected Spain’s banking sector to implement reforms and that Spain would be held to its previous commitments to reform its labour market and manage its deficit.
The statement said that meant the cost could reach €100bn
International pressure on Spain to solve its financial problems has grown more urgent in recent weeks. On Thursday ratings agency Fitch hit Spain with a three-notch downgrade of its credit rating that left it two levels above junk status.
Then on Friday, Moody’s Investor Services warned it could downgrade Spain and other countries in the eurozone.
The International Monetary Fund yesterday released a report estimating that Spanish banks needed a recapitalisation injection of at least €40bn following a stress test it performed on the country’s financial sector. That report came out three days ahead of schedule, underscoring the urgency of the situation.
US treasury secretary Timothy Geithner welcomed Spain’s decision and the offer of European support, describing them 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”.
French finance minister Pierre Moscovici said the deal would “contribute to restoring confidence in the eurozone”.
Spain’s financial problems are not due to Greek-style government overspending, but banks getting caught up in the collapse of a property bubble.
But as Spain’s leaders have struggled for a solution to their banking crisis, the country’s borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek rescues.