Spain's PM hails 100 billion euro lifeline, denies deficit impact
Prime Minister Mariano Rajoy applauded the large European loan for Spain's struggling banks, but claimed the money would not add to the country's deficit.
Europe offered Spain on Saturday up to 100 billion euros ($125 billion) to recapitalize its beleaguered banks, a rescue package designed to stave off an economic collapse in Spain that could drag down the eurozone and the global economy.
The money would come as a cheap loan from the European bailout fund, set up by European governments, and would go to Spain's bank recapitalization fund, disbursed by the Spanish government under advisement from the International Monetary Fund. The exact amount of the loan will not be announced until the end of June, after two bank stress tests and two independent audits are completed.
The rescue should give Spain more time to return to growth. It should also give a reprieve to unsustainable market pressure on peripheral economies, including Italy, with the cost of borrowing for Europe expected to decrease now that doubts about Spain are eased.
“Yesterday the winner was the credibility of the European project, the future of the euro currency, of the Spanish financial system, and of the ability of credit to flow,” said Prime Minister Mariano Rajoy today.
However, Mr. Rajoy and his government are being criticized for its lack of transparency during the negotiations, and in continuing to rely on euphemisms rather than clearly telling the public the downsides of the deal.
Even though it was widely reported that a rescue package would be announced Saturday, the government was denying it even as late as Friday.
Today, Rajoy claimed that the loan – equal to about 10 percent of the country's gross domestic product – would not add to the country's deficit, but offered no explanation of how or why. To offset the widely expected strain on Spain's budget, the European Commission has already recommended a sales tax increase, as well as more reforms to control regional government’s spending.
Rajoy also declined to enter into a debate about his government's refusal to call the 100 billion euros a "rescue" or a "bailout." Yesterday, his economy minister Luis de Guindos told a press conference: “We are asking for financial support. This is by no means a rescue. It’s a loan under extremely favorable terms, a lot better than the markets ones."
Spanish press reported the rate would be around 3 percent, around half the rate that Spain agreed to pay Thursday in an auction of 10-year bonds.
The lifeline to Spain does differ from those given to Greece, Ireland, and Portugal in that the loan will be used exclusively for banks, not to finance public spending. In doing so, Europe supports the government’s claim that its woes are not related to debt levels or to insufficient reforms or cuts. Indeed, the Spanish government already secured most of its credit obligations for 2012.
De Guindos tried to reassure Spaniards that they would not suffer further pain from the rescue. “There are financial conditions, but not fiscal or macroeconomic. The conditions are for the banks, not for society,” De Guindos said. He didn’t offer more details as the negotiations are still ongoing.
Spain's banks were hit by a bursting construction bubble several years ago, with builders unable to pay back loans which resulted in the decapitalization of some banks. The bank rescue reflects the decrepit state of the Spanish economy and Europe’s urgency to preempt what most economists agree was a ticking bomb for the global economy.
The cash made available more than doubles the 40 billion euro that the IMF estimated Spanish banks would need. The IMF said 70 percent of Spain’s banks are in good shape, but the remaining 30 percent needs recapitalization.
De Guindos said that not all the money would necessarily be used and that the amount includes a “big security margin,” suggesting Spain was going for an overkill to preempt any surprises.
“Ultimately, the goal is to have solvent, strong banks that can offer credit. There is no other reason. It’s extremely difficult to have an economic recovery if there are lingering doubts about the solvency of financial institutions,” De Guindos said.