Economic misery will get worse despite bailout request: P.M.
MADRID (AP) ― Spain’s grinding economic misery will get worse this year, despite the country’s request for a European financial lifeline of up to 100 billion euros ($125 billion) to save its banks, Prime Minister Mariano Rajoy said Sunday.
A day after the country conceded it needed outside help following months of denying it would seek assistance, Rajoy said more Spaniards will lose their jobs in a country where one out of every four are already unemployed.
“This year is going to be a bad one,” Rajoy said Sunday in his first comments about the rescue since it was announced the previous evening by his economy minister.
The conservative prime minister added that the economy, stuck in its second recession in three years, will still contract the previously predicted 1.7 percent in 2012 even with the help.
Spain on Saturday became the fourth ― and largest ― of the 17 countries that use Europe’s common currency to request a bailout. This is a big blow to a nation that a few years ago took pride as the continent’s economic superstar only to see it become the hot spot in the eurozone debt crisis. Its economy is the eurozone’s fourth largest after Germany, France and Italy.
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Demonstrators bang pots during a protest against the financial crisis and the latest government Economic measures in Sol square, Madrid, Sunday. (AP-Yonhap News) |
Although Spain has not yet said how much money it would seek, the Eurogroup ― finance ministers of the 17-country eurozone, of which Spain is a member ― said in a statement Saturday that it was prepared to lend up to 100 billion euros. The funds, which will come from one of three pools of emergency financing eurozone countries can access, will be sent to the Spanish government’s Fund for Orderly Bank Restructuring, which would then use the money to strengthen the country’s teetering banks.
Across the country, Spaniards reacted with a mixture of anger and relief to the news. The full amount of the eurogroup’s lifeline amounts to 21,000 euros of new debt for each person ― almost equal to the average salary in a country of 47 million where the unemployment rate for those under age 25 is 52 percent.
The country is already reeling from deep austerity cuts Rajoy has imposed over the last six months that have raised taxes, made it easier to hire and fire workers, and cut deep into cherished government programs, including education and national health care.
“It’s obviously a shame,” said civil servant Luisa Saraguren, 44, as she strolled on a sunny Sunday morning with her young daughter. “But this bailout was fully predictable, and the consequences of this help are going to be a lot bigger compared to the cuts we’ve been living with already.”
Rajoy took pains to avoid the word bailout Sunday, saying Spain’s rescue package is a line of credit that its most troubled banks will be able to tap. The assistance will not come with the outside control over government macroeconomic policy like that imposed Greece, Ireland and Portugal when their public finances were bailed out.
He said interest rates on the loans will be considerably lower than the rate near 7 percent that Spain has been forced to pay recently on the international debt markets, a level that forced the other countries to seek bailouts. The government will be responsible for collecting repayments from the banks, with interest, and returning the money to the Eurogroup, although interest rates and loan duration details have not yet been revealed.
German Finance Minister Wolfgang Schaeuble said Spain’s debt to GDP ratio was more favorable that even Germany’s, with Spain at 78 percent of GDP and Germany’s at 82 percent.
“Spain is making the necessary reforms to improve its competitiveness and to limit its fiscal policy to a sustainable deficit. By the way, Spain’s overall debt (ratio) is lower than Germany’s,” Schaeuble said.
The bailout also spurred Irish opposition finance spokesman Michael McGrath to criticize his government for not having negotiated better terms, saying it needed “to start fighting Ireland’s corner in a more vigorous and forceful way.”
Spain hopes to regain the economic credibility it has lost by shoring up its banks. This should result in credit being restored so businesses and individuals shut off from loans can start borrowing and the economy will grow again, Rajoy insisted, again without saying when.
Europe’s widening recession and financial crisis have hurt companies and investors around the world. Providing a financial lifeline to Spanish banks is likely to relieve anxiety on the Spanish economy ― which is five times larger than Greece’s ― and on markets concerned about the country’s ability to pay its way.
Spain’s government will make a formal approach for aid once independent audits of the country’s banking industry have been carried out.
It is not yet clear whether the money will come from the EU’s 440 billion euros European Financial Stability Facility, the new 500 billion euros European Stability Mechanism, or a combination of the two.
The deal is to be underwritten by the Spanish state, which will use the FROB as its mechanism to funnel the loan to banks in need. Opposition leader Alfredo Perez Rubalcaba said he had discussed the loan with Rajoy and added by the banks, “including the corresponding interests.”
Economy minister Luis de Guindos said 30 percent of the banking system needed recapitalization. The IMF in its financial stability assessment report said, without listing names, that Spain’s two large internationally active banks “are well diversified.” It is understood that these are Banco Santander and BBVA.
It said seven former savings banks that have received state support “rely significantly on FROB for capital and liquidity support” and that other medium and small private sector banks which account for approximately 11 percent of domestic banking were also exposed to the real estate and construction sector.
Spain’s financial problems are not due to Greek-style government over-spending. The country’s banks, particularly its savings banks or “cajas,” got caught up in the collapse of a real estate bubble in 2008 that got worse over the past four years. However, as Spain’s leaders have struggled for a solution to their banking crisis, the country’s borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek rescues.
Some of Spain’s banks are struggling with toxic real estate loans and assets amid fears the problem will get worse as more jobless people can’t pay their mortgages. The Bank of Spain says the toxic loans and assets total around 180 billion euros. Nationalized lender Bankia SA, which has requested 19 billion euros in aid, has 32 billion euros in toxic assets. Around four other banks serving the domestic market were assessed by the IMF report to have large exposure to corporate and retail real estate lending.
“I could never get my mind round the scale of consumption in Spain over the past 20 years, having known it in the 1960s when it was still extremely poor,” said Paul Preston, a history professor and expert on Spain with the London School of Economics. “Lots of people enjoyed the consumer boom, but not everybody. Now everybody’s having to pay for it.”
Rajoy blamed Spain’s woes on the previous Socialist administration of Jose Luis Rodriguez Zapatero without mentioning him or his government by name. Zapatero was ousted by Rajoy in a landslide in November by voters outraged over the Socialist handling of the economy.
“Last year Spain’s public administration spent 90 billion eurosmore than it took in. This can’t be maintained. We can’t live like that,” Rajoy said.
But Socialist Party leader Rubalcaba said Rajoy should acknowledge that Spain is now in bailout territory.
“The government is trying to make us believe that we’ve won the lottery, that the Three Kings of Orient have arrived, and that isn’t so,” Rubalcaba said.
After his news conference, Rajoy defended his decision to jet off an hour later to Poland to see Spain’s famed national football team take on Italy in the Euro 2012 competition. He said he would be on the ground in Gdansk only for the game before flying back to Madrid on Sunday night.
“I’ll be there 2 1/2 hours and then I’ll leave,” Rajoy said. “I think the national team deserves it.”
Rajoy was seen cheering as Cesc Fabregas equalized to give Spain a 1-1 draw against Italy.
