Spain’s bailout: A painkiller or a cure?

Mariano Rajoy, the Spanish prime minister, has called the eurozone decision to lend Spanish banks up to $125bn a victory for the euro.

“I don’t see how it [the bailout] is a victory for the euro, particularly if you look at how Spain got itself into this mess in the first place …. The bubble-and-bust we saw in Spain was partly a result of the one-size-fits-all monetary policy and structural flaws in the eurozone.” – Raoul Ruparel, the head of economic research at Open Europe

The financial plan to shore up Spain’s position had been agreed ahead of elections in Greece on June 17 – a vote that could push Athens out of the EU and spark a flight of capital.

Spain, which is the eurozone’s fourth-largest economy, has joined Greece, Ireland and Portugal in asking for outside help to survive Europe’s debt crisis.

But the Spanish government has refused to accept this as a bailout, instead calling it a “soft loan”.

China, Japan, the US and others have praised Spain for asking the EU for help.

The agreement did not impose any conditions on the Spanish economy, and no new austerity measures were asked for. Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector.

This was not the case with Greece. In May 2010, the EU made it clear it would only hand over a second loan if Greece introduced a massive new austerity plan. Greece will have to reduce its debt to around 121 per cent of its gross domestic product by 2020, meaning a reduction of 40 per cent on the existing figure.

In the case of Ireland, EU ministers handed over a $113bn aid package in November 2010. And in May last year, the EU approved $116bn for Portugal. Both countries are said to have met the harsh austerity target demanded under an EU-IMF bailout plan.

So, will the eurozone bailout work for Spain, or is it just another stop-gap?

“Most of Spain’s savings banks are public entities and had kept the problem hidden until there was a recovery to unearth them, the recovery didn’t come so now you have the problem of toxic assets impacting some of the non-toxic assets.” – Daniel Lacalle, a senior fund manager at Ecofin

Olli Rehn, the EU economic affairs commissioner, said the deal was a clear signal that the eurozone was ready to take decisive action to contain the crisis.

“I’m confident that this will send a strong signal to the markets that the euro area is ready to support Spain in its efforts to restructure and recapitalise its banking sector,” Rehn said, adding: “This is important in order to ensure that credit can flow to companies and households in Spain and that we can contain the contagion.”

Inside Story asks: Is this “soft loan” a bailout package under another name? Will it be a temporary painkiller, or a long-term solution? And will it be enough to stop the fear of contagion spreading to Italy?

To discuss this, presenter Stephen Cole is joined by guests: Raoul Ruparel, the head of economic research at Open Europe, a eurosceptic think tank; Daniel Lacalle, a senior fund manager at Ecofin, an investment management firm; and Cristina Manzano, the editor-in-chief of the Foreign Policy Spanish Edition online magazine.

“We still have to see how the whole decision evolves; what will be the conditions for Spain and how the markets react …. It is an evolution of the whole Spanish and eurozone economies.” Cristina Manzano, the editor-in-chief of Foreign Policy Spanish Edition online magazine

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SPAIN’S FINANCIAL HEALTH:

• Spain is the fourth country in the eurozone to seek financial assistance
• The EU is offering up to $125bn credit to help the country’s weakest banks
• The Spanish economy is struggling with weak banks, rising debt and recession
• The IMF says Spain’s banks need at least $50bn in capital injections
• Spain has the highest unemployment rate in the eurozone at 24.4 per cent, with more than half of those under the age of 25 unemployed
• On Thursday, the Fitch Rating Agency downgraded Spain’s credit to ‘BBB’ – just two notches above ‘junk status’