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Eurozone offer Spain €100bn bailout - but is it enough?

The Momentum UK Team 11 June 2012

As Spain celebrate their ‘victory’ after €100bn loan was confirmed by Eurozone on Saturday, concerns are already circulating about whether the offering will be sufficient enough to help the country out of its debt crisis.

Eurozone rescue

In the midst of the Eurozone crisis, Spain emerged as the fourth and largest country to come forward and ask for help. After the rapid demise of their property market left the country engulfed in debt from bad loans, they turned to the EU for support.

Shortly after, it was agreed by EU finance ministers that Spain would receive a loan at a maximum of €100bn (£81bn). The money would be lent by European Financial Stability Facility (EFSF) as an attempt to protect the country’s economy, currently taking heavy blows from high interest rates on bad debt, from from further decline.

‘Soft loan’ not a bailout?

The Spanish government made their stance on the loan very clear, dismissing suggestions that the loan was a ‘bailout’ for the country’s economy by describing it as a ‘soft loan’ with fair interest rates (believed to be around 3pc per year) and ‘favourable’ conditions.

Both Mariano Rajoy, Spanish Prime Minister and Luis de Guindos, Finance Minister put on a triumphant front during press conferences about the loan proposing that it was a ‘victory’ not only for Spain but also for the EU and the Euro.

A day after the loan agreement, Mariano Rajoy commented:

“Yesterday the future of the euro won. The solidity of Spain's financial system won, the credibility of the euro won.”

“If we hadn’t done this in these past five months, what was put forward yesterday would have been a bailout of the Kingdom of Spain.”

“Because we had been doing our homework for five months, what did happen yesterday, what was agreed, was the opening of a line of credit for our financial system.”

Mr de Guindos also squashed claims of the loan be offered to rescue Spain, saying it would merely ‘reduce pressure’ on their economy, providing an additional ‘security margin’.

The aftermath

In spite of the Spanish government’s optimistic view to the loan, many analysts have raised concerns that the money is likely to prove insufficient in solving the country’s economic needs and cause problems for public finances.

The exact loan amount is set to be negotiated next month based on thorough analysis from experts into how much the country needs to save their banks. Olli Rehn, top EU economist was quick to explain that the European Commission and other professionals would be the deciders, not the government of Spain.

In comparison to the borrowings of Greece, Portugal and Ireland, Spain’s loan has been described as “the most significant and alarming development in the two-year-old eurozone crisis” by Nicholas Spiro of Spiro Sovereign Strategy. This is mainly due to the fact that Spain’s economy is almost twice the size of the other three countries’ combined.

Although Rajoy claimed that the loan would not affect the country’s public finances, experts have also been quick to dispute this. Raoul Ruparal of think-tank Open Europe said:

“If this is a victory - finally dealing with a glaring problem after four years - then we don’t want to see a defeat,”

“Spanish debt to GDP could be about to jump by 10pc in the near future and given its current path this could put Spain over 90pc debt to GDP, the level beyond which sustainability becomes questionable, much sooner than had been anticipated. This will require adjustments in its reform programme and lead to increasing market pressure.”

Chief economist of Saxo Bank, Steen Jakobson argued that it is unlikely that public finances will go unscathed even if it done indirectly, saying “a bailout is a bailout, Spain, sorry.”

While Mr Rajoy blamed the problematic economic climate on previous government’s financial tactics. He said:

“Last year, the country's public administration spent more than €90bn than it received. You can't go on like that."

“This year is going to be a bad one. Growth is going to be negative by 1.7pc, and also unemployment is going to increase.”

Momentum