Brussels, 11/06/2012 (Agence Europe) - Spain has become the fourth eurozone country to officially request international financial aid to bail out its banking sector that has suffered a massive downward plunge due to problems in the real estate sector. The country was unable to provide the necessary financing alone. The amount of aid has been set at a maximum of €100 billion and is conditional on reforms that exclusively focus on the Spanish financial sector. This approach is less intrusive than in the Greek, Irish and Portuguese scenarios and allows Spain to challenge the term “bail out” that is commonly used. It was welcomed by the markets on Monday 11 June and has brought some much needed relief to Europeans who would like to see swift action taken a week before the elections in Greece. Should this therefore be seen as an indication to Greece of the EU's ability to provide rapid and well-gauged aid to a country experiencing difficulty?
On Monday 11 June, a spokesman for the Commissioner in charge of the euro, Olli Rehn explained that the aid to Spain, “is not about bailing out the bankers or bondholders” because it aims to relaunch the recovery through conditions that will enable Spanish banks to begin making loans again to the economy. French Economy Minister Pierre Moscovici said that the approach “testifies to greater solidarity between eurozone countries and their clear determination to ensure eurozone stability”. AFP also reported that the minister was convinced that this aid would also help bring about a return to growth in Europe.
€100 billion. The Eurogroup has pledged to raise €100 billion to help out a third of the whole banking sector whilst maintaining sufficient room for manoeuvre. Why this amount? Because it intends to cover any possible scenarios, even the worst, said Rehn's spokesman. He also alluded to domestic factors in Spain, such as exposure to the real estate markets and external aspects such as jitters on the financial markets. He also said that this aid would not necessarily be the only aid provided because there was a certain margin allowed that would enable banks to seek for capital from the markets.
The aid will be provided either through the European Financial Stability Facility (EFSF), a temporary fund which still contains €240 billion, or the European Stability Mechanism (ESM), which will have an intervention capacity of €500 billion, most likely this coming July. The definitive amount will be decided after two external auditors, commissioned by the Spanish government, have provided their estimate of the Spanish banking sector's requirements. These estimates will then need to be officially communicated next week, with 21 June being touted as the likely date. The IMF, which will supervise operations without lending any money, has said that €40 billion in recapitalisation will be necessary.
The loans granted will be at interest rate levels that will be determined by the instruments used and the current market conditions observed. Nonetheless, they will be less than if Spain had exclusively borrowed on the markets. They will swell the country's public debt. The recapitalisation mechanisms, however, have not yet been decided so “it is not yet possible to say” what the impact of these loans on the Spanish public deficit will be, said Rehn's spokesman.
In a declaration adopted on Saturday, the Eurogroup expressed the view that the Spanish Fund for Orderly Bank Restructuring (FROB) “might” receive the financial aid and transfer it to the banks concerned. With the FROB acting on behalf of the Spanish authorities, the Spanish government “will maintain total responsibility for the financial aid and sign the memorandum of understanding”. Germany was at pains to emphasise this point.
Conditions. After the Spanish government presents a formal request for aid, the European Commission in liaison with the ECB, the European Banking Authority (EBA) and the IMF will present an evaluation of the needs. It will also bring forward with a proposal linked to the conditions needed for the financial sector, indicated Eurogroup. These measures will lead to the restructuring of the banking sector in line with European rules on state aid as well as, “structural horizontal reforms of the financial sector”. The Spanish press has spoken, for example, of ending 50-year mortgages that were granted during the real estate bubble.
In an attempt to minimise the financial impact of this call for help, the Spanish authorities are emphasising the fact that the conditional nature of the aid only concerns the national banking sector. On Sunday, during an improvised press conference organised before his departure for Poland for the game between Spain and Italy, Spanish Prime Minister Mariano Rajoy refused to employ the word “rescue” and insisted on the success of his austerity policy which would mean that Spain would avoid any real rescue plan worthy of the name. “If we had not done what we've done over the past five months, what was on the table yesterday would have been an intervention in Spain”. The man in charge of officially requesting aid for Spain, Spanish Finance Minister Luis de Guindos simply referred to a “credit line” granted to the national banking sector.
Several declarations back up the Spanish position. Even though a “troika” will supervise the banking reforms, Spain “does not need” macro-economic adjustment programmes that are necessary in Greece, Ireland and Portugal, said German Finance Minister Wolfgang Schäuble, speaking on the German radio station, Deutschlandfunk, on Monday. On Sunday, Commissioner Rehn provided a guarantee that “there will be no new conditions in other areas like fiscal policy and structural reforms”.
The Eurogroup acknowledges that Spain has already begun substantial reforms in the budgetary, banking and labour market fields. It says that it is confident that the country will respect its excessive deficit reduction commitment. Spain is to bring its 8.9% deficit down to 5.3% of GDP this year. The Commission recently suggested extending the deadline for returning to below the 3% benchmark by a year, from 2013 to 2014. A decision is expected to be taken during the Ecofin Council. On Monday, the Spanish Economy Ministry reaffirmed that it would pursue its issuing timetable, while the other countries under guidance no longer have access to long-term debt markets. More than €50 billion in sovereign bonds had already been issued, 57% of the total medium- and long-term volume of debt to be raised this year. Nonetheless, regional banks' financial difficulties are likely to increase the cost.
Eurozone finance ministers also highlight the commitment of the Spanish authorities to correct macro-economic imbalances within the budgetary process known as the “European Semester”. It is highly likely that Spain will be asked to apply the Commission's recent recommendations to the letter (reform of the pension system and increases in indirect taxation).
In a joint statement, José Manuel Durão Barroso and Olli Rehn pointed out that, “with this thorough restructuring of the banking sector, together with the on-going determined implementation of structural reforms and fiscal consolidation, we are certain that Spain can gradually regain the confidence of investors and market participants and create the conditions for a return to sustainable growth and job creation”.
Ireland. At the end of 2010, Ireland was also obliged to request international financial aid to bail out its banking sector. It has closely followed the negotiations between Spain and its European partners. Dublin would have preferred to see Madrid being offered the possibility of European rescue funds directly recapitalising Spanish banks, which would have encouraged it to renegotiate the previous agreement with institutional lenders. The minister responsible for the financial sector Brian Hayes told the Irish Times: “An EU-wide solution where banks could be recapitalised through emergency funding, without the debt then going on the national debt of the respective countries, would be the better way to go”. (MB/transl.fl)