On Saturday seventeen finance ministers from the Euro zone along with Spanish government officials in Madrid agreed to provide Spain with a large financial bailout package for its weakened banking system that is still hurting from its toxic assets following the real estate bubble burst in 2008.
On Saturday Spanish Finance Minister Luis de Guindos said during a news conference that the European Union will give Spain a loan of as much as €100 billion ($125 billion USD) that Madrid will direct to Spanish banks needing additional capital.
It will count as public debt and be funneled through Spain’s rescue fund. The interest will add to Spain’s deficit.
“The Spanish government declares its intention to request European financing for the recapitalization of the Spanish banks that need it,” Economy Minister Luis de Guindos said to reporters at news conference in Madrid.
Finance Minister Luis de Guindos said the European Union will lend the money to Spain’s bank-rescue fund, which will direct it to the banks based on the findings of reports by two independent auditors that are scheduled to complete a stress test of lenders by June 21st.
Last Thursday credit rating Fitch downgraded Spain and said the cost of Spain bailing out its troubled banks is likely to cost around €60 billion but could rise to as much as €100 billion or or 9% of gross domestic product.
In May the New York Times reported that financial institutions in Spain have accumulated €323 billion euros ($418 billion USD) in real estate assets, of which 175 billion euros was labeled “problematic” by the Bank of Spain last year.
In recent weeks, the calls for a Spanish banking bailout have grown louder and more persistent with the euro declining below 1.30 and Spain’s 10 year bond yield rising over 6%.
Last month after the Spanish government took a 45 % stake in Bankia, the country’s third-largest bank with €32 billion euros of troubled assets, it was widely portrayed as a government clean up of a messy banking problem that could spill over into the wider economy and lead to major bank runs, threatening the stability of the entire euro zone.
Bankia has the largest exposure to the real estate sector and needs €19 billion euros to provide temporary financial respite for its books.
Spain’s new conservative government led by Spanish PM Mariano Rojay has emphatically resisted calls for an international bailout and bristled at any new associations of the latest €100 billion banking package as a “bailout package”.
“This is a loan, not a bailout” Rojay explained to reporters on Saturday.
“Getting a €100 billion credit line is not such an easy thing to achieve,” Rajoy said at a news conference.
Leaders in the 17 member euro zone are still nervously awaiting the upcoming Greek elections next Sunday on June 17th, with the possibility of Greece’s anti-bailout party, Syriza, gaining majority seats and tearing apart Greece’s austerity bailout deal with the European Union.
Supporting Spain’s banks with a large €100 billion financial lifeline sends a strong message to euro skeptics who doubt the resolve and cohesion of the European Union to handle high debt loads within the euro zone.
Spain is the fourth euro zone country that has received a large financial package within the euro zone.
After loans to Greece, Ireland, Portugal and now Spain, the EU and IMF have committed approximately €500 billion to finance European bailouts according to the Fiscal Times.
But the IMF is not currently involved in funding Spain’s recent €100 billion banking financial rescue deal which comes from the euro zone rescue fund.
Spain’s economy is bigger than those of the first three previous euro zone countries that sought bailouts combined and is possibly one of the most in recession with a real estate market that has still not bottomed while the Spanish economy is faced with a 25% unemployment level and no clear path to growth.
“Spain is in fact the only country in the euro area for which our forecasts show negative growth this year and next year” said EU Economic and Monetary Affairs Commissioner Olli Rehn, according to Reuters.
The European commission had previously suggested that Spain be allowed to relax its deficit targets, but Spanish government officials insisted that they would continue to try to cut their deficit from 8.9% last year to 3% of GDP in 2013.
The European commission may also extend Spain’s deficit targets to 2014.
According to the Wall St. Journal, Olli Rehn, the EU’s economics affairs commissioner reported last month, “We are ready to propose an extension of the excessive deficit procedure deadline by one year to 2014,” adding that this depended on Spain presenting a “clear budget plan” and reining in “excessive spending…especially in its autonomous regions”.
100€ Billion EU Bank Aid With No Strings Attached
PM Rajoy’s government is still awaiting its own commissioned report on the current state of its banking sector.
But the no-strings EU 100 billion loan to Spain has the potential to encourage politicians in Greece, Ireland, and Portugal to seek new ways to re-negotiate their own bailout rescue packages that contains fewer austerity measures.
Unlike Greece, Ireland and Portugal, Spain won’t be asked to implement an extra austerity program beyond one that it has already committed to within the EU.
Finance Minister De Guindos and PM Rajoy both said that conditions on the loans from Europe would apply only to the banks that take the money and wouldn’t affect the government’s economic or fiscal policy.