Trouble in Spain
Under the heavy burden of debt, Spain struggles down the spiraling path of economic disintegration and collapse. It seems Spain is following in the footsteps of Greece and becoming too expensive to finance their debt. Not only are the Spanish banks at risk of bankruptcy, but so is the entire country. If you thought the United States’ unemployment rate was bad, consider the fact that Spain has a 24.4% jobless rate even though they rank as the fourth-largest economy in the Eurozone. Where do they stand right now?
EU Funds to the Rescue
Following an emergency meeting with Eurozone finance ministers, it was decided that Spain would have up to $125 billion available in rescue funds per the European Central Bank and International Monetary Fund. The exact amount they will be given is currently being analyzed and evaluated on a basis of need for the weakest banks. It is estimated that the exact number will be determined by the end of the month, or by early July.
At first, Spain was hesitant to ask for a bailout because of the demands of higher taxes and steep spending cuts that would probably ensue. However, the conditions attached to the loan were apparently not “micro-economic” according to the source quoted by the BBC News. The hope is that the bailout will give companies and families the opportunity to rely on credit from more solvent banks.
Straight to the Banks
There is one major downside to the rescue funds; the government will be required to take responsibility for the funds that go to Spain’s banks. This could add even more weight to the already overwhelming burden on the nation’s economy if the banks can’t pay the money back to the government.
The leaders in Spain are attempting to come up with a solution that would veto the government being held responsible for the loan, including the possibility of an intermediary banking union that would bypass the national governments completely while still being able to provide financial relief to the banks.
The Washington Post reported about the situation recently, mentioning specifically the audits performed by independent auditors hired by Spain’s government. Based on the auditors’ report, the final dollar amount needed with the loan will be determined. So far, the estimate is close to $78.6 billion. This is the minimum amount necessary in order to keep the banks from deflating under a collapsed economy. In a worst-case economic scenario, the auditor’s will perform a “stress test” to see which banks can survive if the economy overturns.
With all the speculation and turmoil in the media and such, the market is full of nervousness and Spain is trying their best to calm some of the fears. One small help is that their Treasury managed to make more than 2.2 billion by selling bonds, easing the tension somewhat. Even if the audits don’t relieve the market mayhem, it does provide a helpful level of transparency and gives investors something to trust in.
Since Spain was able to recover some financial stability from the bonds and although the audits provide some clarity, the hope is that the European Summit in Brussels at the end of this month will provide an even better picture of where the country is headed in the near future. Most people agree unanimously that a bailout is very temporary solution for the financial trouble Spain is in. Hopefully a more long-term plan will be decided on during the meetings at the summit. In the meantime, Spain will continue to hope the market cools down and that the bailout is utilized to its fullest potential.