Monday 11 June 2012

One problem in Europe down with Spain getting 100billion Euros

Full report on Spain weekend bailout package:

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. 

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 (FROB), 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%.

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% 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% of GDP and Germany's at 82%. 

"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 euro European Financial Stability Facility, the new 500 billion euro 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 that for it not to increase the national deficit the entire amount borrowed will have to be paid back to the treasury by the banks, "including the corresponding interests." 

Economy minister Luis de Guindos said 30% 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(STD) and BBVA(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% of domestic banking were also exposed to the real estate and construction sector.

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