Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) to rescue its banks.
Prime Minister Mariano Rajoy, who as recently as May 28 said he wouldn’t seek a bailout, characterized the deal as a credit line for banks and an endorsement of his policies. He spoke to reporters today in Madrid before flying to Gdansk, Poland, for a soccer match between the national team and Italy.
“The 100 billion euros is the number that we were looking for so I’m cautiously optimistic,” Olly Burrows, credit analyst at Rabobank International, said in a telephone interview from London. “We still have to find a solution to the sovereign debt crisis: it’s not done yet and we still have to press on with the task of uniting Europe.”
Just seven months after winning a landslide victory,Rajoy was forced to abandon his bid to recapitalize Spanish banks without external help as the Treasury’s access to capital markets narrowed. Foreign investors slashed their holdings of Spanish debt amid concern banks’ bad loans may overwhelm public finances, driving borrowing costs to near euro-era records.
Yesterday’s move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil. Spain’s bonds have slumped since the government announced the nationalization of Bankia Group last month, sending the yield on 10-year notes close to the euro-era high of 6.78 percent on May 30. It closed at 6.22 percent on June 8.
Economy Minister Luis De Guindos, who denied he had received pressure from European colleagues, announced the request yesterday after a three-hour conference call with his European counterparts. He said the terms of the rescue loans are “very favorable” compared with market rates.
The funds will be channeled through the state-run FROB bank-rescue fund, and will add to Spain’s debt, which was 68.5 percent of gross domestic product last year. Should Spain request the maximum amount, it would add about 10 percentage points to that number. De Guindos said interest paid on the loans will affect the deficit, which is the euro-area’s third- largest at 8.9 percent of GDP.
Rajoy told reporters it wouldn’t affect the deficit and said Spain pushed for the 100 billion-euro ceiling on the credit line as a buffer to restore market confidence. He stuck to his plans to travel to the European soccer championships in Poland, “now that the situation is resolved.”
“If we hadn’t done what we’ve done in the past five months, the intervention of the Kingdom of Spain would have been on the table yesterday,” Rajoy said. “As we have been doing our homework for five months what was agreed yesterday was the opening of a credit line for our financial system.”
De Guindos and Rajoy said conditions on the loans will be tied to the banks and the rescue doesn’t change economic or fiscal policy. Still, the Spanish government is responsible for the loan, and progress on reforms and budget cuts “will be closely and regularly reviewed also in parallel with the financial assistance,” the finance ministers’ statement said.
The loans will carry an interest rate of about 3 percent, El Pais reported today, citing people familiar with Spain’s negotiations with its European partners whom the newspaper didn’t identify by name.
European officials have failed to control a debt crisis that started in Greece at the end of 2009 and has now claimed the euro region’s fourth-largest economy. The bailout adds to the 386 billion euros ($480 billion) in pledges to Greece, Ireland and Portugal that European governments and the International Monetary Fund have made since 2010. Spain is twice the combined size of those three economies.
Spain has made at least four attempts to overhaul its banks since the collapse of the real estate boom in 2008, tightening provisioning rules, encouraging mergers and coaxing lenders onto the stock market. The International Monetary Fund said that “gradual approach” had allowed weak banks to undermine financial stability.
The Spanish government’s credibility was jolted by the funding hole reported last month by the Bankia group (BKIA), the third- biggest Spanish lender. The bank’s new managers went beyond the government’s provisioning rules and asked for a 19 billion-euro bailout. De Guindos had said two weeks earlier that 15 billion euros would be enough to meet the requirements of the second of two banking decrees he has drafted this year.
“The Spanish problem was entirely avoidable,” said Thomas Mayer, an economic adviser to Deutsche Bank AG in Frankfurt. “When Bankia got into trouble and they had to inject another 19 billion, the market thought, well, they don’t know what they are doing.”
Spain’s bank rescue fund will only inject the EU funds into lenders that need it, and de Guindos said many banks won’t require cash as difficulties are concentrated in about 30 percent of the industry.
The International Monetary Fund, which will have an advisory role in the rescue after saying in a report June 8 that Spanish banks would need at least 37 billion euros to withstand a weakening economy, praised the agreement. U.S. Treasury Secretary Timothy F. Geithner said the loans and the support from its EU partners were “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.”
The loans will ease pressure on the Spanish Treasury, de Guindos said. The debt agency has reduced its issuance at debt auctions this year as foreign investors cut holdings of Spanish securities. That has increased Spain’s dependence on domestic banks, which in turn depend on the ECB for funding.
Still, the agreement may spur further downgrades in the nation’s credit rating. Moody’s Investors Service, which grades Spain at A3, said on June 8 that as the nation moved closer to needing external help “the increased risk to the country’s creditors may prompt further rating actions.”
Finland will also demand collateral for their share of the loans if the funds come from the temporary European Financial Stability Facility, Finance Minister Jutta Urpilainen told reporters yesterday. Ministers haven’t decided whether that fund or its permanent successor, the European Stability Mechanism, will be used, Urpilainen and de Guindos said. Should the ESM provide the funds, the loans would be senior to outstanding government debt, giving Spain’s EU lenders protection at the expense of bondholders.
“Market reaction is unlikely to be favorable given that the bailout places even more strain on Spain’s creditworthiness, sets a precedent that the euro zone’s other bailed-out countries, in particular Ireland, are likely to object to, and risks putting pressure on Italy,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in a note.
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