A demonstrator hits a pot during a protest against the financial crisis and the latest government Economic measures in Sol square, in Madrid, Sunday.
Daniel Ochoa de Olza, Associated Press
Spain's Prime Minister Mariano Rajoy spoke during a press conference Sunday at the Moncloa Palace in Madrid.
Daniel Ochoa De Olza, Associated Press
Rescue of Spain buys Europe time
- Article by: PAUL WISEMAN and PETER SVENSSON
- Associated Press
- June 10, 2012 - 9:37 PM
WASHINGTON - A $125 billion plan to rescue Spain's banks that was adopted over the weekend won't solve Europe's debt crisis or ease the pain of double-digit unemployment across the continent.
But it is likely to calm financial markets and buy time for European policymakers to work with other weak economies threatening the stability of the 17 countries that use the euro.
Europe still has plenty of troubles to address in the three other countries that already have received financial help -- Greece, Portugal and Ireland. In Greece, voters could elect a government next Sunday that will refuse to live up to the terms of its $170 billion rescue package. Portugal is combating a toxic combination of high debt and 15 percent unemployment. Ireland is cleaning up a banking mess a lot like Spain's. Then there's Italy, the eurozone's third-largest economy, where government debt is piling up as the economy stagnates.
"We still have some pretty fundamental problems to solve," said Nicolas Veron, senior fellow at the Bruegel think tank in Brussels, Belgium. "We need more radical solutions than this one."
Spain on Saturday asked finance ministers for the eurozone countries to rescue its banks, which have been crushed under the weight of bad real estate loans. The finance ministers responded by offering up to $125 billion in loans that the Spanish government could funnel to banks.
The plan eases an immediate crisis in the euro's fourth-largest economy. The deterioration of Spain's banks and the pressing need for a rescue was threatening to bankrupt its government. That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland.
"This move brings into sharp relief the enormous amount of money that will be needed to cordon off the rest of the eurozone periphery in the event of a Greek meltdown," said Eswar Prasad, professor of trade policy at Cornell University.
Investors are worried about what will happen when Greek voters go to the polls.
If Greece reneges on the strict austerity measures that come with its rescue package, it could be forced to abandon the euro. Greece's departure from the eurozone would likely cause financial chaos across Europe: Greek debts would go from being denominated in sturdy euros to being denominated in Greek drachmas of dubious value. Worse, a Greek exit from the euro would raise fears that another European country such as Portugal or Italy might be next.
"A significant part of this [bailout for Spanish banks] has to do with ring-fencing Greece," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. "This is enough to prevent added market contagion."
But analysts said even bolder action may be needed from some key European governments and institutions that have been leery of committing too much to the effort.
Germany is worried
Germany, worried that it will get stuck with the bill for any ambitious schemes, has rejected several ideas for easing the crisis. It has been reluctant to ease the terms of previous bailouts to reduce the pain of government spending cuts on Greece, Portugal and Ireland. And it has resisted calls for the creation of joint "eurobonds" that would raise money and spread responsibility for repayment across the eurozone countries.
Likewise, the European Central Bank has been reluctant to intervene to jolt the eurozone economy. Last week, it passed up an opportunity to reduce interest rates. And it has been reluctant to flood the economy with money to push down interest rates the way the U.S. Federal Reserve has.
The rescue money for Spain will come from pools set up by other euro countries. Spain's government will distribute it to the banks. The banks will pay it back with interest, and the money will go back to the rescue pools. Interest rates and other details have not been revealed.
Even with the move, Prime Minister Mariano Rajoy said Sunday that Spain's grinding economic misery would get worse this year. He predicted increasing unemployment and said the economy still would contract the previously predicted 1.7 percent.
Spain had been resisting pressure to seek outside help for its banks. But leaders became increasingly concerned that any fallout from Greece's upcoming election would rock markets, further hurting Spain's financial sector. The exact amount Spain needs won't be clear until outside accountants complete an audit of its banks by June 21.
Unlike the three other European countries that have received financial help, Spain did not have to agree to deeper cuts in its government budget to secure the help.
Working in Spain's favor is the fact that its public debts aren't especially high. They amounted to less than 69 percent of its gross domestic product at the end of 2011. Even Germany, an economic powerhouse, has public debt that amounts to 82 percent of annual economic output.
Spain already has agreed to government belt-tightening. More austerity probably would have pushed Spain, already suffering from near-25 percent unemployment, deeper into recession.
"You don't want an economy of that magnitude going down the tubes," said Daniel Drezner, a professor of international politics at Tufts University in Medford, Mass.
European economic troubles also pinch U.S. businesses. U.S. companies send 22 percent of the goods they export to Europe and have more than $2 trillion invested in factories, offices and businesses there.
A bigger fear is that Europe's financial troubles could cross the Atlantic. When banks lose confidence in each other, they refuse to lend each other money. Credit dries up, depriving economies of the fuel they need to grow. A financial crunch can wreck the economies on both sides of the ocean as it did in 2008.
"Anything that calms European markets is good for the United States," said Tufts' Drezner.
© 2013 Star Tribune