Europe bailout of Spain could cost $125 billion

Europe bailout of Spain could cost $125 billion

MADRID — Europe is to offer Spain a bailout package of up to (EURO)100 billion ($125 billion) to help rescue the country's banks and keep the 17-country eurozone from breaking apart.

After months of fierce denials, Spain admitted it would tap the fund as it moved faster than expected to stem the economic crisis that has ravaged Europe for two years.

Spain becomes the fourth - and largest - European economy to ask for help and its admission of help comes after months of market concern about its ability to pay its way. In recent weeks investors have demanded higher and higher costs to lend to Spain, and it became clear it would be just too expensive for the country to borrow the money necessary for a bank rescue from the markets.

The three countries that have received rescues thus far — Greece, Ireland and Portugal — are fairly small, and many have worried that bailing out much-larger Spain could call the entire euro project into question. Cyprus, also a small economy, could also be forced to seek a bailout soon.

Economy Minister Luis de Guindos said Saturday the aid will go to the banking sector only and so 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.

A statement from the finance ministers of the 17 countries that use the euro explained that the money would be fed directly into a fund Spain set up to recapitalize its banks, but underscored that the Spanish government is ultimately responsible for the loan.

Still, that plan allows Spain to avoid making the onerous commitments that Greece, Ireland and Portugal were forced to when they sought their rescues. Instead, the eurogroup 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 labor market and manage its deficit.

The exact figure of the bailout, however, has not yet been decided. De Guindos said the country is waiting until independent audits of the country's banking sector have been carried out before asking for a specific amount. The audits are expected June 21 at the latest.

De Guindos did say, however, that Spain would request enough money for recapitalization, plus a safety margin that will be "significant." The eurogroup statement said that meant the cost could reach (EURO)100 billion. The aid package was announced after a video conference of euro zone finance ministers.

With markets in turmoil, 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 recapitalization."

"Therefore, the Spanish government states its intention to request European financing for the recapitalization of banks that need it," the minister told a press conference after a videoconference with colleagues from the eurozone.

The Spanish acceptance of aid for its banks is a big embarrassment for Prime Minister Mariano Rajoy, who insisted just 10 days ago that the banking sector would not need a bailout. For him and officials of his government, that had become something of a mantra. He was elected in November and walked right into a hurricane.

International pressure on Spain to solve its financial problems has been growing 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.

In the early hours of Saturday, the International Monetary Fund released a report estimating that Spanish banks need a recapitalization injection of at least (EURO)40 billion ($50 billion) 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.

U.S. President Barack Obama, facing re-election, enduring a weak economy and in need of strong trading partners, expressed concern late Friday over the European economic crisis.

U.S 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."

"The accord announced tonight speaks to a reinforced solidary among the countries of the eurozone and to their resolute desire to ensure its stability," he said in a statement.

Some of Spain's banks are struggling with by toxic real estate loans and assets. The Bank of Spain says they total around (EURO)180 billion. Nationalized lender Bankia, SA, which has requested (EURO)19 billion in aid, has (EURO)32 billion in toxic assets. Around four other banks are considered prime candidates for bailouts. De Guindos said Saturday the sector is largely solid and the euro zone package will be funnel toward only about 30 percent of it.

Analyst Rafael Pampillon if IE Business School in Madrid said the bailout addressed the uncertainty the markets had felt about how Spain's debt-laden banking sector would recapitalize.

"This uncertainty, and hence the panic, will slowly dissipate from the markets," he said. Pampillon added that with polls forecasting a pro-Euro victory in Greek elections, markets would be further relieved because the austerity conditions imposed on Greece would most likely be fulfilled.

Moody's said Spain's banking problem is largely confined to that country and not likely to spill over to other eurozone nations, with the exception of Italy — where the European Central Bank has already stepped in to buy government bonds as a way to help lower the country's borrowing costs.

Spain has been criticized for being too slow to set out a roadmap to resolve its problem. European business leaders and analysts have stressed that Spain must find a solution quickly so that it is not caught up in any market turmoil sparked by the Greek elections on June 17. There are concerns that anti-bailout left-wing party Syriza could become the largest party in the Greek parliament, putting the country's membership in the eurozone at risk.

But others said it's more important for Spain to correctly assess how to shore up its banking system than it is to hurry into a bailout ahead of the Greek elections.

If Spain doesn't get a request for outside help right the first time, "then you are in second bailout territory," said Mark Miller, an analyst with Capital Economics in London.

Working in Spain's favor is the fact that its public debt is actually quite low, at 68.5 percent of its gross domestic product at the end of 2011.

Its debt is predicted to hit 78 percent by the end of the year, but even that figure would be below the debt-to-GDP ratios of Europe's strongest economy, Germany, which is at 82 percent.

But Spain's in its second recession in three years, with unemployment at nearly 25 percent and little hope for improvement this year. Prime Minister Mariano Rajoy's government has imposed a wave of austerity measures since he took office in December that have raised taxes, made it cheaper to hire and fire workers and cut government funding for education and health care.

IMF, US praise 100 bn euro bank deal for Spain

The IMF and US both praised a Eurogroup deal giving Spain a lifeline of up to €100 bn ($125 billion) to save its stricken banks, with International Monetary Fund Managing Director Christine Lagarde calling it a "credible back stop" for the banking system.

"I strongly welcome the statement by the Eurogroup, which complements the measures taken by the Spanish authorities in recent weeks to strengthen the banking system," said Lagarde.

"Providing a credible back stop to recapitalize weaker segments of the banking system has been a key recommendation of the IMF's recent Financial Sector Assessment Program (FSAP) conducted in Spain," she said.

Lagarde also had words of praise for the operation's scope.

"The willingness of Spain's Euro Area partners to financially support the Fund for Orderly Bank Restructuring (FROB) with up to EUR 100 billion is a crucial step for the success of the Spanish authorities' strategy," she said.

"This scale of proposed financing, which is consistent with the capital needs identified in the FSAP, gives assurance that the financing needs of Spain's banking system will be fully met.

"The IMF stands ready," said Lagarde, "at the invitation of the Eurogroup members, to support the implementation and monitoring of this financial assistance through regular reporting."

US Treasury Secretary Timothy Geithner also welcomed the moves, saying: "These are 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."

German Finance Minister Wolfgang Schaeuble also hailed the deal for Spain, saying he and his colleagues welcomed Madrid's "determination" to recapitalise the banks with "rescue funds".

His French counterpart Pierre Moscovici called it a good agreement which gives "a very strong signal of solidarity" among Spain's eurozone partners.

Japanese Finance Minister Jun Azumi joined in praising the lifeline Sunday, calling it a "major first step" toward stabilising the European and global economy.

"The confirmation of the scheme worth 10 trillion yen (100 billion euros or $125 billion) should greatly contribute to stabilisation," Azumi told local reporters, referring to both the global economy and Spain's troubled banking system.

"I hope that such actions will continue to be taken flexibly with a sense of speed. In that respect, I think this is a major first step," he said.

After the hastily organised video conference, lasting more than two hours on Saturday, the 17 eurozone finance ministers issued a statement saying they were "willing to respond favourably" to a Spanish plea for help.

The deal marks a dramatic climbdown for Spain, where successive governments have hotly denied any need for outside aid.

Prime Minister Mariano Rajoy's conservative government finally bowed to pressure from world leaders and, more importantly, the markets, which have sent Spanish borrowing costs soaring.

"The Spanish government declares its intention to solicit European financial help for the recapitalisation of those banks that need it," a visibly tense Economy Minister Luis de Guindos told a news conference.

De Guindos refused to describe the aid as a rescue deal, which his government had categorically ruled out right up to the last moment.

"This has nothing to do with a rescue," he insisted, arguing that the aid would be directed to the 30 percent of banks with the greatest exposure to the 2008 property market crash.

The deal imposed no conditions on the overall Spanish economy, and no new austerity measures, de Guindos stressed.

"The only conditions are for the banks," the finance minister said, conceding however that the deal will further increase Spain's mushrooming public debt.

Nevertheless, the eurozone ministers said they were confident Spain would honour commitments to cut the deficit and restructure the economy. "Progress in these areas will be closely and regularly reviewed," they said in the statement.

Spain, which will become the fourth eurozone state to receive financial help since the sovereign debt crisis erupted two years ago, finally sought aid as the cost of buttressing the banks spiralled in past weeks.

Recently nationalised Bankia, which has the largest exposure to the real estate sector, needs 19 billion euros to repair its books.

Under Saturday's deal, up to 100 billion euros would be provided by the European rescue mechanisms to recapitalise Spanish banks, the eurozone ministers said, providing an "effective backstop" for all possible requirements.

"So we have a new concept. A 'lite' bailout with no material conditions on the sovereign and instead merely the banks that apply," Lloyds Banking Group economist Charles Diebel said in a report.

"This is the latest in the long list of euro measures to stem the crisis. Will it be enough? That's questionable as it is still prevention rather than cure and again only keeps the banking sector alive rather than really supporting growth."

The scale of the aid depends on an external audit being carried out for Madrid by consultants Roland Berger and Oliver Wyman. The audit is due by June 21 but de Guindos said it would ready within a few days.

De Guindos stressed that the 100 billion euros included a big safety margin.

"This announcement is good news for the Spanish economy and for the future of the eurozone," he said.

International Monetary Fund bank stress tests, unveiled Friday three days ahead of schedule, determined that Spanish banks need about 40 billion euros in new capital.

But an IMF official noted that the banks would probably need more than that to build a "credible firewall".

The assistance is to be channelled through Spain's state-backed bank Fund for Orderly Bank Restructuring, eurozone policymakers said.

Policymakers hope the rescue will satisfy financial markets and put Spain in a safe harbour ahead of the Greek elections on June 17, which risk leading to a destabilising exit from the eurozone.

Bailout for Spain's banks buys time for Europe

WASHINGTON — The plan to bail out Spain's banks with up to $125 billion in aid buys European policymakers time to try to save the euro and eases deep fears in global financial markets.

The deterioration of Spain's banks and the pressing need for a rescue was threatening to bankrupt its government. That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland, smaller economies that have received bailouts.

Investors need all the reassurance they can get. They're already worried about what will happen when Greek voters go to the polls June 17. The Greeks could elect a government that will refuse to live up the terms of a $170 billion bailout. That could force the country to exit the euro — an outcome that would raise fears that another, bigger European country might be next.

"A significant part of this (bailout for Spanish banks) has to do with ring-fencing Greece," says Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. "This is enough to prevent added market contagion."

Spain on Saturday asked the 17 countries that use the euro currency for money to rescue its banking system. European officials responded by offering to provide up to $125 billion to rebuild Spanish banks' capital, their financial bulwark against losses on bad loans.

Europe's troubles also are causing economic problems for the United States and developing countries such as China and Brazil, which rely on Europeans to buy their exports. So the plan unveiled Saturday eases pressure on President Barack Obama and the world economy as well.

"This move will come as a relief to the Obama administration as it suggests that European leaders are finally beginning to take significant actions to ease the intensifying pressure on the euro zone's peripheral economies" such as Spain and Portugal, says Eswar Prasad, professor of trade policy at Cornell University.

Spain had been resisting pressure to seek outside help for its banks, which have been overwhelmed by bad real estate loans. But leaders became increasingly concerned that any fallout from Greece's upcoming elections would rock markets, further hurting Spain's financial sector. The exact amount Spain needs won't be clear until outside accountants complete an audit of its banks by June 21.

Unlike the other European countries to receive bailouts, Spain did not have to agree to deeper cuts in its government budget to secure the help. More austerity likely would have pushed Spain, already suffering from near-25 percent unemployment, deeper into recession.

"You don't want an economy of that magnitude going down the tubes," says Daniel Drezner, a professor of international politics at Tufts University in Medford, Mass. Spain has the world's 13th-biggest economy, more than four times the size of Greece's. It is the fourth-largest economy in Europe.

In recent weeks, jittery investors had demanded higher interest rates on Spanish bonds, making it clear that Spain would not be able to borrow enough money in the markets for its own bank bailout. The rising fears come at a time when nearly half the countries that use the euro are in recession. At 11 percent, unemployment in the euro zone is at the highest level since the single currency was introduced in 1999.

European economic troubles pinch U.S. businesses. U.S. companies send 22 percent of the goods they export to Europe and already have more than $2 trillion invested in factories, offices and businesses there. A bigger fear is that Europe's financial troubles could cross the Atlantic. When banks lose confidence in each other, they refuse to lend each other money, causing a credit crunch that can wreck economies on both sides.

"Anything that calms European markets is good for the United States," says Tufts' Drezner.

The Spanish deal also gives European policymakers more time to strengthen the single currency. They are already talking about creating a "banking union" with a centralized regulator, a bailout fund and a European Union-wide deposit insurance backstop.

"Spain's decision to seek a bailout for its banks buys some temporary breathing room for the Eurozone," Cornell's Prasad says.

But Europe's troubles aren't over.

Europe still needs to find a way to stimulate economic growth across the continent so that European countries can begin to grow their way out of their debt problems. And the eurozone countries must pull closer together politically and economically, agreeing to more standardized policies limiting government debts and strengthening bank regulation.

Meantime, other big countries continue to struggle with big government debts and wounded banks.

"You don't know if three months from now it's going to be Italy" lining up and asking for a bank bailout, Drezner says.