After the Spanish government finally admitted that it needed help to prevent its banking sector collapsing, at an emergency discussion on Saturday 9th June Eurozone finance ministers agreed to lend Spain up to €100bn to recapitalise its banks.
The Eurogroup statement explained that the €100bn total would be to cover estimated requirements and provide an additional safety margin. The loan will be scaled to provide an “effective backstop covering for all possible capital requirements”.
The situation is fast moving, but here’s a summary of the key facts after the first few days.
Is the bailout the same as Portugal, Greece and Ireland’s?
The loan to Spain is not to bailout the government, but rather to recapitalise its banking system. Before the 2008 financial crisis the government had relatively little debt and was running a budget surplus. Its problems do not stem from excessive state spending but from the banking sector which was left with huge amounts of “toxic” loans when the property market crashed.
Banks need to raise even more money to recapitalise to meet international requirements and cannot afford to do so themselves. The Spanish government cannot either because its borrowing costs have soared with the uncertainty over the peripheral Eurozone states. Borrowing from the EU’s rescue funds means they can borrow at much lower rates.
Where will the money come from?
The money will be provided by the Eurozone’s bail out funds. One concern for investors is that the Eurogroup statement was not clear on which one, simply saying “the EFSF/ESM”.
The European Financial Stability Facility (EFSF) is the current temporary fund. It is due to be replaced in July by the new permanent European Stability Mechanism (ESM). Loans from the ESM are senior to other creditors and must be repaid first. Germany believes it would be “more efficient” for the loans to be made by the ESM, while Madrid would probably prefer to use the EFSF.
Either way, it is ultimately paid by taxpayers across the Eurozone.
The International Monetary Fund (IMF) cannot contribute funds to this particular bailout as its rules prevent it from participating in a rescue solely focused on the banking sector. It will still play an advisory role.
Where will the money go?
The loan will be given to the Fund for Orderly Bank Restructuring, which acts an agent for the Spanish government, which will then distribute capital to the financial institutions as needed. The Spanish government retains full responsibility.
Will there be supervision?
Prime Minister Mariano Rajoy initially claimed the rescue deal was a victory for Spain and that it will not be subject to the same level of supervision as Portugal, Greece and Ireland. He said his decision to seek the funds was “the opening of a line of credit” for the banks rather than a bailout with strict external supervision.
However, EU and German officials have since said that it will be monitored by the European Commission, European Central Bank and the IMF – the “troika” – the same as the other bailouts.
The Eurogroup statement had also said that progress will be closely and regularly reviewed, also in parallel with the financial assistance.
Is €100bn enough?
The €100bn offered is much more than expected. EU finance ministers wanted to take pre-emptive action and send a clear signal to the markets and public that they are ready to take “determined action”.
An IMF review into the Spanish banking sector, released just before the bailout request, looked at how Spanish banks would cope with an economic situation where gross domestic product fell by 4.1% and house prices by 20% this year. It calculated banks would need a €37bn injection – much less than the €100bn now on the table.
The Spanish government and regulators have so far underestimated the problems facing the sector and the amount of fresh capital needed. Only time will tell if €100bn is enough – investors do not seem entirely convinced.
Will this mean more austerity measures in Spain?
So far it does not look that way, as the conditions should apply to the banking sector and not the whole economy. With regards Spain’s budget deficit reduction plan, the government claims the goals and premises are realistic, and the tough measures already imposed will be decisive in returning growth to a strong growth path. It aims to consolidate public finances to the tune of €27bn this year. Income and savings taxes have been hiked as part of the measures, and a tax “amnesty” is being introduced to collect unpaid tax. If it does not meet the deficit target we cannot rule out further tax rises.
Does this mean bank savings in Spain are now safe?
They are safer than they were. However all this has reminded us that cash savings are not an entirely risk free investment, and not only in Spain. If you have savings amounting to more than the national guarantee scheme, perhaps even if you have less, you may want to take advice from a professional wealth management firm like Blevins Franks on more secure options for your money as well as how to avoid higher taxation.
By Bill Blevins, Blevins Franks Financial Correspondent
13th June 2012
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.