Spain to Accept Rescue From Europe for Its Ailing Banks

(…..) The maximum figure of $125 billion was intended to cover the “estimated capital requirements with an additional safety margin”, according to the statement issued by eurozone finance ministers. The statement also said eurogroup “supports the efforts of Spanish authorities to resolutely address the restructuring of its financial sector”. Christine Lagarde, the managing director of the I.M.F., said the scale of the proposed financing “gives assurance that the financing needs of Spain’s banking system will be fully met”. And United States Treasury secretary, Timothy F. Geithner, called the support European partners were showing Spain “important for the health of Spain’s economy”. He said that Spain’s request for aid and Europe’s agreement were “concrete steps on the path to financial union, which is vital to the resilience of the euro area.” “It’s a calming signal at a time when calming signals are badly needed”, said Jens Boysen-Hogrefe, an economist at the Kiel Institute for the World Economy. But Mr. Boysen-Hogrefe said it did not solve underlying problems of Spain or the euro area as a whole. “The uncertainty is still high and bad news can pop up anywhere in the euro area. This is not a final solution”. Many financial analysts expect the Greek elections next week to spook the already unsettled markets and test the very cohesion of the euro zone. Before Saturday, Mr. Rajoy had tried to hold out against the withering pressure of capital markets, which drove up Spain’s borrowing costs, and the lobbying of European leaders, led by Chancellor Angela Merkel of Germany, to come up with a plan to recapitalize the banks hit worst by the bursting of Spain’s property bubble. Mr. Rajoy wanted the rules changed, or at least bent, so the money went directly to the banks and Spain could claim more convincingly it had not received a bailout. The money, however, will be channeled through Spanish bank-bailout fund, and Spanish government will ultimately be responsible and will have to sign the memorandum of understanding and the conditions that come with it. Still, Mr. de Guindos said that, based on his discussions with eurozone ministers, he expected the terms of emergency loan to be “very favorable.” He noted not all of Spain’s banks would need help, adding that “the problem that we face affects about 30% of the Spanish banking system”. European leaders have underscored previously, and reiterated in their statement on Saturday, that Spain had made significant budget cuts and labor market reforms. Germany’s finance minister, Schäuble, praised the steps undertaken thus far, calling the teleconference “constructive” and saying in a statement that “Spain is on the right path and Germany, just like the other countries and institutions of eurozone, as well as probably the I.M.F., will support Spain on that way”. Robert Tornabell, a banking professor at Esade business school in Barcelona, said that despite the government’s insistence to the contrary, “What has just been agreed is in fact a bailout, just like what had to be done for Ireland because of its banking problems” (…..)



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9 Responses to Spain to Accept Rescue From Europe for Its Ailing Banks

  1. Professor Uziel Nogueira says: Spain is caught up in a debt trap and trowing good money after bad money only prolongs the financial crisis. From the EU and euro zone perspective, the alternative is not even an option i.e., let the Spanish banking system go broke. The crisis in the euro zone is systemic and Spain too big to fail in the the aftermath of a possible Greek exit. The question is whether the EU’s bailout fund is the end or the beginning of a new virulent stage of the debt crisis. Next week, the international markets will give a preliminary answer to the bailout fund. It depends how operators respond and play the money game. Given so much money on the table, will operators buy or sell Spanish debt and equities at lower interest rates or, hold rates steady? The market knows that up to $100 billion euros is on the table to play the Spanish-euro zone game. The limit of the game is the $ 500 billion euros set up to rescue countries in financial trouble. After Spain is done, Italy is the next country in line. The debt game is just beginning because the EU is a rich region with the main ingredient for financial speculation in place. That is, an European Central Bank that can issue unlimited amount of euros to keep the game going. As the Wall Street saying goes, as long as the music keeps playing, the hedge funds continue to dance. The US is relatively safe, for now, from the European debt trap because it is the sole issuer of a world currency, the dollar.

  2. (…..) The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening (…..)

  3. En el mismo fin de semana en que se celebra la primera vuelta de las elecciones legislativas en Francia, que podrían confirmar el tan mencionado giro a la izquierda en el vecino del norte, España ha acaparado los titulares en todo el mundo. Ya sea por las necesidades de Obama desde Washington pensando en la reelección o las necesidades de Bruselas por aminorar el posible impacto de las próximas elecciones griegas, la cuestión es que ayer se coronó el estado de ansiedad permanente que sufre la sociedad española. Sin lugar a dudas, no es descabellado afirmar que en los próximos días podremos vislumbrar el alcance de semejante “golpe” anímico o psicológico en el entorno del Gobierno/PP, los partidos políticos nacionales, los bancos españoles y la totalidad de la sociedad española. En ese contexto, sería prudente y de gran urgencia valorar lo acontecido ayer a la tarde, pues sí de credibilidad se trata, entre una gran mayoría de españoles, nuestro sistema político y de representación también está en crisis.

  4. Can Germany save Europe? It’s tempting to think so. Costs are mounting; over the weekend, European leaders offered Spain up to $125 billion to prop up its shaky banks. German Chancellor Angela Merkel has been cast as Europe’s Scrooge dispensing austerity and discouraging recovery. If Germany would only open its wallet, Europe’s instability and suffering would shrink. Well, maybe. But this seductive theory may be wishful thinking, overstating Germany’s power and understating Europe’s problems. The dark truth may be that even a willing Germany can’t rescue Europe (…..) To Germans, other European countries must now adjust to new, if unpleasant, realities. Chief among these is that the economies of many European countries are no longer strong enough to support their welfare states. Economic growth is too low, populations are aging and demands on pension and health-care systems are too high. Benefits must be cut or taxes raised without doing too much damage to economic growth or the social fabric. It’s a tall order that would be aided by a large and stable source of credit: a rescue fund allowing embattled countries to borrow at low rates while instituting essential policy changes. So far, Europe’s response has been a series of stopgaps, the Spanish loan being the latest. But Germany is not wealthy enough to anchor such a fund. Together, Italy’s and Spain’s economies equal Germany’s. What if France gets in trouble? Only the United States along with China and other countries with large foreign exchange reserves could create such a fund. That this now seems politically impossible is one measure of global peril.

  5. Oh, wow — another bank bailout, this time in Spain. Who could have predicted that? The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed. Just to be clear, Spanish banks did indeed need a bailout. Spain was clearly on the edge of a “doom loop” — a well-understood process in which concern about banks’ solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash; in this case, however, the Spanish government’s own solvency is in question, so the cash had to come from a broader European fund. So there’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless. Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move. And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and “internal devaluation,” which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European “core,” mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move. Meanwhile, senior officials are asserting that austerity and internal devaluation really would work if only people truly believed in their necessity (…..)

  6. Professor Uziel Nogueira says: Prof K plays the US ‘growth versus austerity’ election theme while Germany plays the integration game. The former is a local American economic policy issue between Democrats versus Republicans. The latter is a SERIOUS political game that goes beyond economic policy approaches. It is about the future of a common currency (the euro) and EU’s 27 member countries and 500 million people. Germany plays the integration or disintegration game while Prof K plays the political game of which political party will govern the country in the next four years. Two different games played at two different levels in the North Atlantic region. The $ 100 billion euros bailout of Spain’s financial system was inevitable. However, it only adds more fire to further financial attacks on debt and equities. Markets operators have a new game in town of $100 billion euros, out of a common fund of $ 500 billion, to be played in the next few months. Italy is the next country in line after the Spanish game is over. The conclusion is clear. The more money is trowing into the European Stabilization Fund (ESF), the longer the speculative financial attacks.

    Germany’s leadership is quite aware of this fact and perhaps is making preparation for a small euro zone in the near future.

    The IMF’s forecast of a “lost decade’ in the EU sounds too optimistic at this point. There is no magical bullet to solve the complex European conundrum.

  7. The German business newspaper Handelsblatt has taken a swipe at our latest cover: It’s kind of an odd riposte. You’ve got export-dependent Germany there sitting apart from the world economy (dropping depth charges, maybe?). I’d say the “too big” part refers to debt, but Germany’s public debt is bigger than Spain’s. I’m not sure why America is there; it grew faster than Germany in the year to the first quarter of 2012 (luckily for the Germans, who are net exporters to the American economy). The real takeaway would seem to be the insight this provides into the German mindset; whatever problems the world economy has, the Germans seem to believe, it isn’t Germany’s fault. That point, whatever its truth, is orthogonal to the one made in our cover leader: that Germany’s government, more than any other, has the ability to navigate the euro-zone economy, and by extension the world economy, away from an economic catastrophe. The Handelsblatt image signals that the Germans still don’t get it.

  8. European leaders have long insisted they will do everything to save the euro. Now, a plan is forming that would dramatically change the architecture of the European Union. Brussels would be granted a significant say in national budgets and debt would be communalized. But the hurdles such a plan might face are high (…..) Because they have been unable to find agreement, European leaders have asked top Euro-crats — European Commission President José Manuel Barroso, European Council President Herman Van Rompuy, Euro-Group head Jean-Claude Juncker and European Central Bank head Mario Draghi — to come up with a plan. They hope to share some initial proposals at the European summit scheduled for the end of this month. A concrete plan is to be ready by autumn. The four leaders have begun speaking on the phone almost daily. This week, they are to meet to agree on a common proposal that will then be sent to European capitals. For the moment, though, the plan is nothing but sketches of how the European construction might look in the end. The ideas being tossed back and forth between Brussels, Luxembourg and Frankfurt are incomplete, but they already hint at a concept that would mean nothing less than a European revolution.

    The four are intent on making the currency union irreversible, and deepening it to become a political union.

    A completely different Europe would emerge from such a process. The plan envisions nation states giving up significant elements of their sovereignty to European institutions. It would mean that the European Parliament would have to fight for relevancy with a new body that would be granted important oversight functions.

    The result would be a two-speed Europe, the core of which would be represented by the currency union.

    At the heart of the deliberations is the creation of a real fiscal union, which would prohibit member states from taking on new debt on their own. Governments would only have complete control of funds that are covered by tax revenues (…..)

  9. George Osborne gazes upon Madrid’s meltdown and spies an excuse: the euro ate his recovery. The rest of us should look at how one of the biggest economies in Europe ended up in the sovereign-debt workhouse – and consider how closely Spain’s catastrophe resembles our own. Even while typing this, I know that the comparison sounds a stretch. The eurozone is a foreign country, after all: they do crises differently there. Here, ministers publicly congratulate themselves for still being able to borrow from financial markets, while the press rubbernecks at each new crash on the continent. After being bailed out by Gordon Brown, British banks are merely chronically weak, rather than flat-out with Spanish flu. But look past the financial details – the single-currency contagion, and all those acronyms beloved of Brussels – and the economic situations are more similar than we might like. Just like Britain, Spain enjoyed an unprecedented era of low inflation and cheap money – and squandered it. Bankers in Madrid (and across the country) kept their excesses simple, shovelling cash into the pockets of semi-imperialistic property developers. Their counterparts in London did that too, but also found time to speculate in toxic assets with funny names. Just like Tony Blair, Spain’s José Zapatero asked few questions during the boom, but concentrated on spending the bumper tax revenues on welfare and other well-meaning programmes to enhance social justice. The markets smiling upon them, neither New Labour nor Spain’s socialists made serious attempts to reshape their economies or bring on new industries. Instead, an historic proportion of the young in both countries were sent off to university – coming out the other end overqualified for the jobs available to them. During the boom, the countries were considered such a success that they were given the ultimate benediction of a glossy American magazine cover. In 1997 Liam Gallagher and Patsy Kensit lounged in bed for Vanity Fair; in March 2004, Time declared: “Spain Rocks!” (…..) Discussions of the euro crisis usually treat it as though it’s all happening Over There.

    But places such as Kirkby remind us that what’s collapsed isn’t a handful of countries, but an entire model of economic development: one driven by debt and speculation, and which ignored the need for productive industry.

    Think the Spanish crisis couldn’t happen here? A visit to Kirkby suggests a version of it already has.


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