Spain has at last decided to request European financing to recapitalize its teetering banks, becoming the fourth eurozone country to receive an EU bailout, following Greece, Ireland and Portugal.
Madrid’s request for a financial rescue is welcome news for the global economy, as it would calm market jitters over Spanish banks, which are swamped with bad debts resulting from their reckless lending to property developers.
The specific amount of aid has not yet been set, as an assessment of the capital needs of the banks is due out next week. But eurozone finance ministers agreed Saturday to lend Europe’s fourth largest economy up to 100 billion euros.
The volume of aid is surprisingly large, indicating the eurozone countries’ strong desire to strengthen Spain’s position before the June 17 elections in Greece. The rescue plan will help Spain avoid a contagion should Greek voters push their nation further toward a disastrous exit from the eurozone.
The aid plan for Spain was also hailed as a signal that the eurozone countries have patched up their differences over ways to cope with their long drawn-out debt crisis and started to move toward tighter financial and budgetary ties.
Yet despite the rescue deal for Spain, an unfavorable Greek vote outcome could still throw global financial markets into a tailspin and cause severe economic downturns. Hence it is imperative that governments around the world be ready to respond to that eventuality and take countermeasures.
It was in this context that China recently cut its benchmark interest rate by 0.25 basis points. The surprise move was welcomed by other countries as it would provide a boost to the global economy as well as to China. India, Brazil and Australia have also lowered key interest rates to stimulate their flagging economies.
Yet Korean policymakers have stopped short of implementing stimulus measures. One reason may be the continued growth of the Korean economy despite the eurozone turmoil and a slowdown in China.
Another reason is that the government has few policy options available to inject vitality into the economy. For instance, the Bank of Korea left the benchmark interest rate unchanged for June. The bank has little room to ease its monetary policy as it could lead the already excessive household debt level to increase.
Yet the current situation does not justify complacency or a wait-and-see policy. The government should be prepared for the worst.
Even if Greek voters choose to stay in the eurozone, the region’s debt crisis will last for years, putting a strain on the global economy. As the Korean economy is already feeling the impact, the government should take measures to keep the economy on a growth track.
