Excerpt
Responding to increasingly urgent calls from across Europe and the United States, Spain on Saturday agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion.
European leaders hope the promise of such a large package, made in an emergency conference call with Spain, will quell rising financial turmoil ahead of elections in Greece that they fear could further shake world markets.
The decision made Spain the fourth and largest European country to agree to accept emergency assistance as part of the continuing debt crisis. The aid offered by countries that use the euro was nearly three times the $46 billion in extra capital the International Monetary Fund said was the minimum that the wobbly Spanish banking sector needed to guard against a deepening of the country’s economic crisis.
On Sunday, Prime Minister Mariano Rajoy tried to deflect criticism for his government’s decision to seek assistance for Spain’s ailing bank. The winners, he said, were “the credibility of the European project, the future of the euro, the solidity of our financial system and the possibility that credit will flow again.”
But he warned that Spain’s economic problems would worsen this year despite the request. “This year is going to be a bad one,” Mr. Rajoy told reporters, according to The Associated Press. More people, he said, could lose their jobs — one out of every four Spaniards is already unemployed.
Mr Rajoy also insisted that the rescue deal should not be seen as the fourth bailout in the euro crisis but as a loan to recapitalize Spain’s weakest banks, “which isn’t that easy to obtain.”
The announcement of a deal came amid growing fears that instability in Spain could drag down an already sputtering world economy. The decision was the culmination of weeks of a contentious back-and-forth between Spain and its would-be creditors in which it was hard to tell how much of Spain’s resistance to financial help was tactical maneuvering for a better deal and how much a refusal to admit the depth of the banking sector’s troubles.
"Europe Dodges a Bank Crisis in Spain, but Perils Lurk" by JACK EWING, New York Times 6/10/2011
Excerpt
While the Spanish banking rescue will be expensive — as much as $125 billion — it will be well within the means of a European emergency fund established for just such purposes.
Far harder to calculate are the costs if, after Greek elections next Sunday, the new government reneges on the bailout Greece negotiated with its European lenders a few months ago. That could lead to a withdrawal from the euro zone, threatening that currency union, which has largely benefited more prosperous members like Germany.
What is more, the Spanish bailout will do little to address European banks’ addiction to the borrowed money they have depended on for their daily financing needs.
“The way the currency union has been functioning is not sustainable,” Jens Weidmann, the president of the German Bundesbank, told the Welt am Sonntag newspaper. “A breakup of the currency union would bring extremely high costs and risks that no one can really predict.”
Lucas Papademos, a former interim prime minister of Greece, said that Greece’s departure from the euro zone would be catastrophic, pushing inflation in the country to as high as 50 percent, putting extreme stress on Greek banks and slashing living standards.
“The stakes are exceptionally high,” Mr. Papademos, who is also a former vice president of the European Central Bank, told a group of bankers in Copenhagen last week. “Because the decisions to be made at, and immediately after, the forthcoming elections will determine the country’s future for at least the next decade.”
Those problems would not be Greece’s alone. Europe’s big fear is contagion — an infection of financial panic that could spread far beyond Greece. Spain’s leaders have long said Greece’s problems contributed to the general market uncertainties that helped undermine Spanish banks.
"Another Bank Bailout" by PAUL KRUGMAN, New York Times 6/10/2012
Excerpt
Oh, wow — another bank bailout, this time in Spain. Who could have predicted that?
The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed.
Just to be clear, Spanish banks did indeed need a bailout. Spain was clearly on the edge of a “doom loop” — a well-understood process in which concern about banks’ solvency forces the banks to sell assets, which drives down the prices of those assets, which makes people even more worried about solvency. Governments can stop such doom loops with an infusion of cash; in this case, however, the Spanish government’s own solvency is in question, so the cash had to come from a broader European fund.
So there’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.
And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and “internal devaluation,” which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European “core,” mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.
Meanwhile, senior officials are asserting that austerity and internal devaluation really would work if only people truly believed in their necessity.
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