Spanish drag
June 9, 2012
For weeks, conservative Prime Minister Mariano Rajoy resisted what appeared to be unavoidable - Spain will have use aid from the rest of the eurozone members to protect Spanish banks from a disastrous wave of bankruptcies.
As with his predecessor, it was crisis management that led to the failure of the proud Rajoy, who in November 2011 replaced socialist Jose Luis Zapatero. Rajoy's budget did not have enough money to support the banks.
The country, which is stuck in a recession and suffers from high unemployment, cannot borrow money on the financial market at reasonable costs. The last resort is the European bailout fund - the European Financial Stability Facility. It will pay out up to 100 billion euros ($125 billion) to the Spanish government to recapitalize the ailing banks.
Taxpayers left with the risk
The other eurozone states, with Germany at the head of the pack, will carry the risk for the aid package. More precisely, it will be the taxpayers. It's no accident that the German banking association has pushed for a rescue package for Spanish banks as the crisis in Spain affects the rest of the banks in Europe that have invested there. When the German chancellor helps Spain, she is also helping German banks and herself.
What's next will depend on how finance markets react. If lending premiums for Spanish bonds remain as high as before, Spain will have to use the EFSF to finance its current debts as well as the bank rescue. How much that would cost is difficult to estimate. The 200 billion euros available in the EFSF are enough to rescue the banks. If Spain needs more, it would have to come from the new permanent ESM rescue fund, which is slated to begin work in July. But the fund's largest stakeholder still has not ratified the ESM treaty. The political parties that make up Germany's governing coalition and the opposition in the upper house of German parliament are still at odds. The dispute needs to be settled as quickly as possible. The treaty's adoption is urgently needed.
Is Italy next?
International pressure on eurozone members - and especially on Germany - to do more to rescue indebted countries will increase. Calls for the European Central Bank to print more money to refinance the states will become louder. How long will Germany and the ECB be able to fight off these demands? How long does it even make sense to fight against the demands?
Spain joins Greece, Portugal and Ireland to become the fourth eurozone country that is no longer in a position to pay for its spending on its own. This development shows that the plan used thus far to fight the crisis has failed. Italy could be the next country affected. Then none of the rescue funds would be large enough to finance the excessive debts.
View into the abyss
If Greece descends into chaos after elections on June 17, does, in fact, go bankrupt and leaves the eurzone, it would send a new round of shockwaves through financial markets. Eurozone countries would be staring into the abyss without a prospect of being rescued. It would be just the opposite: Europe could drag the world economy in to the crisis.
No one has a convincing way to get out of the crisis. The fiscal agreement, a banking union, the idea of "more Europe" might help to prevent the next orgy of debt. But action needs to be taken now.
Author: Bernd Riegert / sms
Editor: Richard Connor