Spain bailout and EU policymakers’ worries

9^th June 2012

Annalisa Ratti

Annalisa Ratti

9 June 2012

This afternoon, a thorough conference call involving Eurozone financial ministers will discuss an eventual bailout for Spanish banks.

Spain has denied so far asking for a rescue plan for its banks. But EU sources confirmed that Madrid could formally ask for help to recapitalise its banks during the weekend.

According to the International Monetary Fund, Spanish banks would need to increase their capital by 40 billions euros in total. 

Spain is the fourth economy in Eurozone and the 12^th largest in the world.  Therefore, European policymakers are willing to secure Spain’s economic future within the EU before Greek elections on 17^th June, which could push Greece nearer to exit the euro and potentially unleash a massive wave of contagion. 

The move to save Spain’s economy is determined by fears that a Spanish economic collapse could start a chain reaction, eventually causing the end of the single currency. 

Fears over the disastrous effects of the economic crisis in Spain rose after some of Spain’s major banks announced a desperate need for capitals as a consequence of toxic property loans from the past. 

Spanish leaders hope that EU funds will solve the financial services’ crisis, which escalated since last month’s nationalisation of Bankia, the country’s fourth-largest lender, which was largely exposed to the construction market.

As a consequence, ratings agency Fitch drastically cut Spain’s credit rating to BBB, which hit the Iberian economy even harder.

Angela Merkel, the German chancellor, confirmed that she had not forced Spain towards a bailout, adding: “It’s down to the individual countries to turn to us.”  On the other end Spanish government denied, until this morning, any pending bank rescue announcement.

The proposed cost of the bailout was not disclosed, but it is likely to be between 40 and 100 billion euros. Those funds will come from the Financial Stability Facility, Eurozone’s safety net, which the UK does not contribute towards. Greek total bailout is believed to be of another nature, amounting to more than 320 billion euros.

Annalisa Ratti