Spain relieved, angry over humiliating bank rescue

By Alan Clendenning

Associated Press

Published: Sunday, June 10 2012 2:51 p.m. MDT

Spain hopes to regain the economic credibility it has lost by shoring up its banks. This should result in credit being restored so businesses and individuals shut off from loans can start borrowing and the economy will grow again, Rajoy insisted, again without saying when.

Europe's widening recession and financial crisis have 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.

Spain's government will make a formal approach for aid once independent audits of the country's banking industry have been carried out.

It is not yet clear whether the money will come from the EU's €440 billion European Financial Stability Facility, the new €500 billion European Stability Mechanism, or a combination of the two.

The deal is to be underwritten by the Spanish state, which will use the FROB as its mechanism to funnel the loan to banks in need. Opposition leader Alfredo Perez Rubalcaba said he had discussed the loan with Rajoy and added that for it not to increase the national deficit the entire amount borrowed will have to be paid back to the treasury by the banks, "including the corresponding interests."

Economy minister Luis de Guindos said 30 percent of the banking system needed recapitalization. The IMF in its financial stability assessment report said, without listing names, that Spain's two large internationally active banks "are well diversified." It is understood that these are Banco Santander and BBVA.

It said seven former savings banks that have received state support "rely significantly on FROB for capital and liquidity support" and that other medium and small private sector banks which account for approximately 11 percent of domestic banking were also exposed to the real estate and construction sector.

Spain's financial problems are not due to Greek-style government over-spending. The country's banks, particularly its savings banks or "cajas," got caught up in the collapse of a real estate bubble in 2008 that got worse over the past four years. However, as Spain's leaders have struggled for a solution to their banking crisis, the country's borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek rescues.

Some of Spain's banks are struggling with toxic real estate loans and assets amid fears the problem will get worse as more jobless people can't pay their mortgages. The Bank of Spain says the toxic loans and assets total around €180 billion. Nationalized lender Bankia SA, which has requested €19 billion in aid, has €32 billion in toxic assets. Around four other banks serving the domestic market were assessed by the IMF report to have large exposure to corporate and retail real estate lending.

"I could never get my mind round the scale of consumption in Spain over the past 20 years, having known it in the 1960s when it was still extremely poor," said Paul Preston, a history professor and expert on Spain with the London School of Economics. "Lots of people enjoyed the consumer boom, but not everybody. Now everybody's having to pay for it."

Rajoy blamed Spain's woes on the previous Socialist administration of Jose Luis Rodriguez Zapatero without mentioning him or his government by name. Zapatero was ousted by Rajoy in a landslide in November by voters outraged over the Socialist handling of the economy.

"Last year Spain's public administration spent €90 billion more than it took in. This can't be maintained. We can't live like that," Rajoy said.

But Socialist Party leader Rubalcaba said Rajoy should acknowledge that Spain is now in bailout territory.

"The government is trying to make us believe that we've won the lottery, that the Three Kings of Orient have arrived, and that isn't so," Rubalcaba said.

After his news conference, Rajoy defended his decision to jet off an hour later to Poland to see Spain's famed national football team take on Italy in the Euro 2012 competition. He said he would be on the ground in Gdansk only for the game before flying back to Madrid on Sunday night.

"I'll be there 2 ½ hours and then I'll leave," Rajoy said. "I think the national team deserves it."

Rajoy was seen cheering as Cesc Fabregas equalized to give Spain a 1-1 draw against Italy.

Associated Press writers Jorge Sainz in Madrid, Juergen Baetz in Frankfurt and Shawn Pogatchnik in Dublin contributed to this report.

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