Spain bailout

Unlike Greece, Spain’s troubles did not originate with overspending by the Spanish government. In fact, Madrid entered the eurozone crisis with one of the lowest debt levels in the single currency.
Instead, Spain’s crisis was an Irish and US-style banking crisis. The country’s regional savings banks, known as cajas, invested heavily in the property boom, and they were taken down when the bubble burst.
While Irish and US real estate prices deflated relatively quickly, Spain’s bubble is only now beginning to collapse, thanks in part to a sharp economic downturn. As a result, Spanish banks need to raise even more money to meet international capital requirements.
Already, the country’s fourth-largest bank – Bankia, an amalgam of seven failing cajas – had been partially nationalised because it could not raise the money on its own. As the depths of the bank losses became clearer, Spanish authorities acknowledged other banks would go the way of Bankia, needing government instead of private money.
This comes at a time Spanish government borrowing costs have rocketed because of turmoil in the rest of the eurozone, meaning government rescue loans would be expensive. By getting aid from the eurozone’s bailout funds, which borrow at much cheaper rates, the banks will be able to get back on their feet more quickly.
How is this different?
Until last year, the eurozone’s €440bn rescue fund had one weapon in its arsenal: a full-scale bailout. But after pressure from Brussels, Germany agreed to give the fund, the European Financial Stability Facility, several narrower tools, including the ability to recapitalise banks.
Although EFSF loans must still go to a national government before being injected to struggling banks, the new “recapitalisation tool” allows the aid to be provided without the kind of terms forced on Greece, Ireland and Portugal. Most importantly, Madrid will not have delegations from bailout lenders showing up on a quarterly basis to pore over the government books.
These quarterly visits from the so-called “troika” – International Monetary Fund, European Commission and European Central Bank – have become political lightning rods for Dublin and Athens. The Spanish government dug in its heels against such monitoring.
The reason Madrid won the day was that it had already imposed much of the kind of austerity demanded by Brussels on its own. The 2012 budget included €27bn in cuts and tax increases. The government has vowed to make similarly ambitious cuts next year, too, in order to hit an EU-mandated deficit target of 3 per cent of economic output.

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