Is this a bailout of Spain?
Mariano Rajoy is determined to portray the €100bn as a cash injection for Spain's banks and not a bailout of his country. However, the funds are being made available because Spain cannot afford to prop up its banks with its existing resources and its cost of borrowing on the markets is too high to raise the funds. Jonathan Loynes, chief European economist at Capital Economics, reckons Spain will need more help. "The poor economic outlook will also maintain concerns that Spain will at some point require a government bailout too," Loynes said.
Who is providing the €100bn?
The cash-strapped eurozone nations themselves, although details are hazy as there are two bailout funds: the existing European Financial Stability Fund, and the European Stability Mechanism, which launches next month. If Spain borrows money from the ESM it has to repay these loans ahead of its bond holders, making the markets less willing to lend to Spain. The EFSF allows Spain to honour its own debts first. On Monday an EU official told Reuters the EFSF would provide the cash but these could be transferred to ESM at a later stage – crucially without the requirement that Spain repay its eurozone debts first.
How does the Spanish government get the money?
It will be handed to the government's Fund for Orderly Bank Restructuring which passes it on to the banks. But this does not insulate the public purse from the bailout as Spain's public debt to GDP ratio will rise from 68.5% to a potential 90%.
How does the bailout differ from the rescue of Greece, Portugal and Ireland?
The money is only coming from the euro area and not from the IMF (which includes contributions from the UK) and is just for the banks. There is also much debate about the lack of fresh austerity measures being imposed on the Spanish government, which argues that it has already embarked on tough budgetary measures. Unlike in Greece, losses have not been imposed on holders of Greek government debt although it is not yet clear what the impact will be on holders of bonds issued by Spanish banks.
Does this mean Spain will not be subjected to supervision from the so-called troika – the IMF, EC and ECB?
Spain reckons not. But the IMF and EU officials think otherwise. EU competition commissioner Joaquin Almunia said the IMF would be involved, while Germany's finance minister Wolfgang Schauble said there would be a supervision programme. Amid the confusion, it appears that the supervision focus on restructuring the banks – rather than the economy as has been the case with the other three countries. In other bank rescues the EU has imposed conditions to prevent dividend payments and force big reductions in the size of banks.
Where does this leave the eurozone?
The bank bailout for Spain is a sticking plaster and does nothing to solve the long-term issues about stronger fiscal union. Italian bond yields have started to rise and Cyprus may soon need international help. On the positive side, the absence of extra austerity may indicate that politicians are coming round to the view that it has been ineffective. A new government in Athens on Sunday night may feel empowered to renegotiate more relaxed terms for its bailout – a move that might help keep Greece inside the eurozone.
Read more about this here The Guardian!
