Not so fast, prime minister.
On Tuesday, Spain’s long-term borrowing costs soared to their highest
level since the country joined the euro zone. Investors have apparently
concluded that the rescue is potentially a much better deal for the
banks and their shareholders than for the government, its taxpayers and
bondholders.
Many details of the banking bailout remain to be resolved — including
which of Europe’s rescue funds will supply the money. The one thing that
is clear is that even though the money will be funneled to the banks,
the government in Madrid will ultimately be responsible for guaranteeing
that $125 billion, adding to the Spanish government’s already rising
debt load.
That fact, more than any other, probably explains why there was heavy
selling of Spanish government bonds on Monday and Tuesday. The yield on
Spain’s 10-year bonds — an indicator of the government’s borrowing costs
and the risk of holding that debt — rose Tuesday to as high as 6.8
percent. That is approaching the level that led to bailouts for Ireland,
Portugal and Greece.
With its banking industry in trouble, Spain probably would eventually
have had no choice but to seek a rescue. And by not having to cede
autonomy over its government budgets or spending, Madrid attained a much
better deal than other governments have with their bailouts.
And yet, critics are noting that any upside from the arrangement will go
to the banks and their investors. The potential downside will be the
Spanish people’s to bear.
“Unfortunately Spain didn’t manage to reach one of its main goals in the
negotiations, which was to have Europe bear part of the risk of
rescuing the financial sector, without letting it fall instead directly
onto the shoulders of the Spanish taxpayer,” said Luis Garicano, a
Spanish economist who teaches at the London of School Economics.
“Ultimately, those who lent to our financial system were the banks and
insurance companies of Northern Europe, which should bear the
consequences of these decisions.”
The full bailout loan would add 10 percentage points to Spain’s debt,
raising it to about 90 percent of gross domestic product this year.
And Fitch, the credit rating agency
that downgraded Spain’s government debt nearly to junk status last
week, warned Tuesday, that even if Spain used only 60 billion euros of
the bailout loan, that would put Spain’s debt “on a trajectory to peak
at 95 percent of G.D.P. in 2015.” As recently as April, Luis de Guindos,
the economy minister, had forecast that debt would rise to 78 percent
of G.D.P. this year.
On Tuesday, despite the bailout plan, Fitch downgraded the credit
ratings of 18 Spanish banks. That included Bankia, the troubled mortgage
lender the government nationalized in early May.
Some analysts are questioning the rush by European finance ministers to
push for Spain to accept a bailout before Greek elections on Sunday.
Those elections could create deeper turmoil for the euro zone.
“The Europeans wanted to put a firewall between Greece and Spain, but
they’ve accelerated things in a way that doesn’t at all give confidence
to the markets,” said Xavier Sala-í-Martin, an economics professor at
Columbia University. Instead, he said, the deal “leaves the impression
that everything was just improvised rather than planned properly.”
Until last weekend, in fact, Mr. Rajoy’s government had resisted
formally requesting a rescue package, saying it wanted first to
establish exactly how much money was needed to keep its troubled banks
afloat.
Madrid had already grossly underestimated the problems at Bankia when it
seized the mortgage lender last month after giving it a 4.5 billion
euro cash infusion. Less than two weeks later, the bank’s overseers said
it would need an additional 19 billion euros ($23.88 billion) of new
capital — a declaration that unsettled the markets and threatened to
turn a steady outflow of investor money from Spanish banks into a
torrent.
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