- Decision taken following discussion about eurozone’s struggling economy
- Spanish minister said aid will not come with austerity conditions attached
- Move comes a day after Spain’s credit rating was downgraded
- David Cameron has said UK will not contribute funds to eurozone bailouts
- Euro falls and forecasters say it could hit seven-year lows by September
- Cost of bailout is equivalent to £81billion or $125billion
PUBLISHED: 03:07 EST, 9 June 2012 | UPDATED: 14:12 EST, 10 June 2012
Spain will stay stuck in its second recession in three years, and more Spaniards will lose their jobs in a country where one out of every four are already unemployed, Mr Rajoy said today.
He spoke a day after the country became the fourth – and largest – of the 17 countries that use the common currency to request a bailout.
‘This year is going to be a bad one: Growth is going to be negative by 1.7 per cent, and also unemployment is going to increase,’ Mr Rajoy said.
Spain will regain the economic credibility it has lost by shoring up its banks, which will result in credit being restored so businesses and individuals shut off from loans can start borrowing and the economy will grow again, Mr Rajoy said. But he didn’t offer guidance on how long that could take.
And that, Mr Rajoy insisted, in turn should help restore credibility to the eurozone, which has been shaken for more than two years by the financial crisis.
Europe’s widening recession and financial crisis has 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.
Another huge test for Europe comes next week when Greece holds elections that could determine whether it leaves the single currency. European leaders said it was crucial for Spain to have help lined up for its banks before the June 17 balloting.
Mr Rajoy repeatedly refused to call the rescue package a bailout, saying it is a ‘line of credit’ that is different than bailouts taken by Greece, Ireland and Portugal because their lifelines include strict outside control over public finances – and Spain’s does not.
Mr Rajoy blamed Spain’s woes on the previous Socialist administration of Jose Luis Rodriguez Zapatero without mentioning him or his government by name. Mr Zapatero was ousted by Mr Rajoy in a landslide last November by voters outraged over the Socialist handling of the economy.
‘Last year Spain’s public administration spent 90billion euro more than it took in, this can’t be maintained, we can’t live like that,’ Mr Rajoy said.
He also defended his decision to jet off Sunday afternoon to Poland to see Spain’s famed national football team take on Italy in the Euro 2012 competition. He said he would only be on the ground in Gdansk for the game and would be back in Madrid late Sunday night.
‘I’ll be there two and a half hours and then I’ll leave,’ Mr Rajoy said. ‘I think the national team deserves it.’
The move to formally request a rescue package was announced by the Spanish economy minister Luis de Guindos at a hastily convened press conference in Madrid.
Mr de Guindos did not put a price on the bailout but said it would be ‘significantly’ more than the £32 billion suggested earlier by the International Monetary Fund.
Sources close to the talks suggested up to £80billion or $125billion is likely to be offered.
Less than an hour before the announcement, Spanish government sources were saying that a decision on whether to ask for a bailout would be delayed until auditors had completed examining the books of the troubled banks.
Mr Rajoy had previously insisted that any decision on accepting a loan would come after the results of two independent audits of the Spanish banking system, which has been blighted by the collapse of the country’s property market.
The auditors are due to report within two weeks. Under current agreements, the UK is insulated from the proposed Spanish bailout other than through our membership of the IMF.
Leaders: German chancellor Angela Merkel, left, said today she has not pressured Spain into asking for a bailout. David Cameron has promised that UK money will not be used to prop up European banks
On Friday, the IMF said that a ‘stress test’ showed that while some of Spain’s financial sector was well managed, measures were needed to help people hardest hit by the recession.
‘It is critical that the authorities continue to take decisive action to address the weaker institutions and restore market confidence in Spanish banks,’ an IMF report said.
It warned that delays would make the economic downturn worse.
If Spain – Europe’s fifth-biggest economy – receives the massive handout, it will become the fourth member of the 17-nation eurozone to get help since the Continent’s debt crisis erupted two years ago. It follows bailouts to Greece, Ireland and Portugal.
The financial crisis in Spain provoked an attack on David Cameron by Labour leader Ed Miliband.
HOW MUCH WILL THE UK PAY?
The International Monetary Fund (IMF) made a 27 per cent contribution to the bailout loan to Greece and a third of the total cost of loans for Portugal and Ireland.
As a member of the IMF, the UK has historically contributed 4.5 per cent to any IMF funding.
So that would mean that if Spain gets an £80billion bailout, the UK might be liable to indirectly contribute around £1billion.
He said: ‘As we’ve been saying for many months, we need to ensure there is stability in the banking system and where that requires action, it should take place swiftly. The austerity approach is not working.’
Spain’s fourth-largest lender, Bankia, recently asked for £15 billion to help deal with losses on loans that cannot be repaid.
Many Spanish banks borrowed large amounts on the international markets to lend to developers and homebuyers, a move seen as riskier than funding loans with deposits from savings.
The decision came amid fears that a Spanish collapse could cause a disastrous chain reaction which could eventually destroy the single currency and is follows ratings agency Fitch’s decision to drastically cut Spain’s credit rating to BBB, just two notches above dreaded ‘junk’ status.
It is also just days before elections in Greece and follows an outspoken attack on austerity measures by Barack Obama.
In a sideswipe against David Cameron Mr Obama warned that such measures risked dragging the world economy into a new ‘downward spiral’.
Spanish Economy Minister Luis de Guindos said the aid will go to the banking sector only and so would not come with new austerity conditions attached for the economy in general.
A statement from the finance ministers of the 17 countries that use the euro explained that the money would be fed directly into a fund Spain set up to recapitalize its banks, but emphasized that the Spanish government is ultimately responsible for the loan.
Speaking at a news conference Mr de Guindos said: ‘This is not a rescue, this is a loan which is given in very favourable conditions, which will be determined in the next few days.
‘But they are very favourable – much more favourable than the market ones.
‘We hope that as a result of these injections [of capital] families and companies will have more solvent banks which are able to offer them credit, which they are not able to do at the moment.’
That plan allows Spain to avoid making the unpopular commitments which Greece, Ireland and Portugal were forced to take when they were given bailout loans.
Instead, the eurogroup statement said it expected Spain’s banking sector to implement reforms and that Spain would be held to its previous commitments to reform its labour market and manage its deficit.
He added that Spain would request enough money for recapitalization, plus a safety margin that will be ‘significant.’
With markets in turmoil, de Guindos said the government’s efforts to shore up the financial sector ‘must be completed with the necessary resources to finance the needs of recapitalization.’
Dieter Merz, chief investment officer of Switzerland’s MIG Bank, added: ‘The euro issue is a major one and Spain is in a serious problem. It will remain so until a proper solution is found.’
He said the euro could fall to $1.18 (76 pence) by September – levels not seen since 2005.
The eurogroup said the loans will go to its bank restructuring agency called FROB. In a statement it said it ‘considers that the Fund for Orderly Bank Restructuring, acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned.
The Spanish government will retain the full responsibility of the financial assistance’.
Spanish leaders hope an injection of EU funds will stem the sector’s crisis, which has escalated wildly since last month’s dramatic nationalisation of troubled lender Bankia.
German chancellor Angela Merkel today said she had not forced Spain or any country into taking a bailout, adding: ‘It’s down to the individual countries to turn to us.’
David Cameron has vowed that UK funds will not be used to prop up Spanish banks. ‘I wouldn’t ask British taxpayers to stand behind the Greek or Spanish deposits. It’s not our currency,’ the Prime Minister said.
However, the five main UK high street banks have £160billion tied up in loans, mortgages and government debt in Spain and the other bailout countries – Portugal, Italy, Ireland, Greece and Spain.
The fortunes of RBS and Lloyds are of concern to UK households across the UK as taxpayers are already sitting on a combined loss of almost £40bn as the banks’ share prices have plunged.
Banks have been busy cutting their eurozone exposures, shoring up their finances and building up their capital reserves.
Deputy Spanish Prime Minister Soraya Saenz de Santamaria said no decision on a bailout had been made at Friday’s Cabinet meeting.
She added that the government would not act until it receives a raft of reports on how much money Spain needs to save its banks from collapsing under the weight of soured real estate investments.
An International Monetary Fund report was released late on Friday, and two independent auditor surveys are due by June 21.
Spanish prime minister Mariano Rajoy said yesterday he would await the outcome of two external audits later this month before talking about how to recapitalise troubled lenders.
Spain’s immediate problem is that international markets have become nervous about lending money to it with interest rates rising to 6 per cent.
However this is merely a symptom of problems with the Spanish economy stemming from the bursting of the property bubble.
Before 2008 Spanish debts were only 36 per cent of GDP with the country one of the most thrifty in the eurozone.
Spain’s banks, property developers and ordinary home-buyers collectively borrowed and fuelled an huge property bubble when interest rates fell and property prices tripled between 1996 and 2007.
Now that bubble has burst, property prices are on a downward course and millions are out of work.
The government is borrowing like mad to try and keep the crippled economy afloat.
Read more: http://www.dailymail.co.uk/news/article-2156765/Spain-ask-EU-bailout-today-leaders-try-prevent-collapse-single-currency.html#ixzz1xQuiYo1A