Cause and Effect in European Politics and Law

Spain Will Receive a 100 Billion Euro Bailout

Ralitsa Kovacheva, June 10, 2012

The eurozone will grant Spain financial assistance targeted for bank recapitalisation, the Eurogroup announced on Saturday evening after an hour and a half conference call among the finance ministers. The government is expected to submit a formal request shortly that is going to be respected. The money will be provided by the two eurozone rescue funds to the Spanish Fund for Orderly Bank Restructuring, acting as an agent of the government. In turn, it will sign a memorandum of understanding the conditions of which will focus primarily on financial sector reforms.

Both the Spanish government and the Eurogroup are investing great efforts to ensure that this is not a classic bailout, as in the case of Greece, Ireland and Portugal, but only targeted aid to banks. Therefore, the memorandum will focus only on the financial sector, and will not impose additional austerity measures and structural reforms on the country. The statement of the Eurogroup underlines that "Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks." The Eurogroup believes that the country will honour its commitments to reduce the excessive deficit and to correct macroeconomic imbalances, noting in the same time that "progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance."

The IMF will participate with funds in the rescue programme and will only monitor its implementation. According to a European official, quoted by The Financial Times, the Fund`s rules prevent it from lending to financial institutions and to provide aid that is not linked to a full-scale macroeconomic adjustment programme. In a statement, IMF Managing Director Christine Lagarde said that the amount of 100 billion euros would fully cover the capital needs of the Spanish banking system.

The news of the loan came during the weekend apparently aiming to avoid negative effects on the financial markets. The hopes of both the Spanish government and the other eurozone countries are that the markets will be "relented" by the fact that it is not about a real bailout and will not rapidly increase Spain's borrowing costs, thus cutting off its access to funding.

At the same time, there is also a clear intention to outrun the Greek elections on 17 June in order to avoid the potential consequences for the euro area if the result is in favour of the anti-European parties. The markets have already calculated the probability of Greece leaving the eurozone, but the negative effects on the other countries under rescue programmes, as well as vulnerable countries like Spain and Italy, will be inevitable.