Bailout in Spain Leaves Taxpayers Liable for the Cost

After clinching a $125 billion bailout for Spain’s banks, Prime Minister Mariano Rajoy flew to Poland on Sunday for the Spanish team’s soccer match, declaring “this matter is now resolved.”

plaza reial barcelona spain
Samuel Aranda | Getty Images
plaza reial barcelona spain

Not so fast, prime minister.

On Tuesday, Spain’s long-term borrowing costs soared to their highest level since the country joined the euro zone. Investors have apparently concluded that the rescue is potentially a much better deal for the banks and their shareholders than for the government, its taxpayers and bondholders.

Many details of the banking bailout remain to be resolved — including which of Europe’s rescue funds will supply the money. The one thing that is clear is that even though the money will be funneled to the banks, the government in Madrid will ultimately be responsible for guaranteeing that $125 billion, adding to the Spanish government’s already rising debt load.

That fact, more than any other, probably explains why there was heavy selling of Spanish government bonds on Monday and Tuesday. The yield on Spain’s 10-year bonds — an indicator of the government’s borrowing costs and the risk of holding that debt — rose Tuesday to as high as 6.8 percent. That is approaching the level that led to bailouts for Ireland, Portugal and Greece.

With its banking industry in trouble, Spain probably would eventually have had no choice but to seek a rescue. And by not having to cede autonomy over its government budgets or spending, Madrid attained a much better deal than other governments have with their bailouts.

And yet, critics are noting that any upside from the arrangement will go to the banks and their investors. The potential downside will be the Spanish people’s to bear.

“Unfortunately Spain didn’t manage to reach one of its main goals in the negotiations, which was to have Europe bear part of the risk of rescuing the financial sector, without letting it fall instead directly onto the shoulders of the Spanish taxpayer,” said Luis Garicano, a Spanish economist who teaches at the London of School Economics. “Ultimately, those who lent to our financial system were the banks and insurance companies of Northern Europe, which should bear the consequences of these decisions.”

The full bailout loan would add 10 percentage points to Spain’s debt, raising it to about 90 percent of gross domestic product this year.

And Fitch, the credit rating agency that downgraded Spain’s government debt nearly to junk status last week, warned Tuesday, that even if Spain used only 60 billion euros of the bailoutloan, that would put Spain’s debt “on a trajectory to peak at 95 percent of G.D.P. in 2015.” As recently as April, Luis de Guindos, the economy minister, had forecast that debt would rise to 78 percent of G.D.P. this year.

On Tuesday, despite the bailout plan, Fitch downgraded the credit ratings of 18 Spanish banks. That included Bankia, the troubled mortgage lender the government nationalized in early May.

The Calm Before The (Greek Election) Storm?

Some analysts are questioning the rush by European finance ministers to push for Spain to accept a bailout before Greek elections on Sunday. Those elections could create deeper turmoil for the euro zone.

“The Europeans wanted to put a firewall between Greece and Spain, but they’ve accelerated things in a way that doesn’t at all give confidence to the markets,” said Xavier Sala-í-Martin, an economics professor at Columbia University. Instead, he said, the deal “leaves the impression that everything was just improvised rather than planned properly.”

Until last weekend, in fact, Mr. Rajoy’s government had resisted formally requesting a rescue package, saying it wanted first to establish exactly how much money was needed to keep its troubled banks afloat.

Madrid had already grossly underestimated the problems at Bankia when it seized the mortgage lender last month after giving it a 4.5 billion euro cash infusion. Less than two weeks later, the bank’s overseers said it would need an additional 19 billion euros ($23.88 billion) of new capital — a declaration that unsettled the markets and threatened to turn a steady outflow of investor money from Spanish banks into a torrent.

Two consulting firms hired by the government to conduct stress-test audits of the Spanish banking industry, Roland Berger and Oliver Wyman, are not scheduled to present their findings until June 21. Another four consulting firms are auditing the 14 largest Spanish financial institutions, with those results not expected before the end of July.

Still, the International Monetary Fundon Friday evening in Washington, ahead of a release scheduled for Monday, published its assessment of Spanish banks, providing a rationale for the weekend rescue deal. The I.M.F. said that Spanish banks would need at least 37 billion euros in extra capital. The European finance ministers decided to lend out nearly three times that amount.

“Everybody moved too fast, based on too little information,” Mr. Sala-í-Martin said. “The I.M.F. report comes out looking a little bit superficial, and certainly can’t be used to conclude exactly how much money needs to be put on the table.”

One thing the I.M.F. report did, however, is split Spanish banks into different risk categories, which in itself has fueled another debate within Spain’s banking industry. Some of the best-situated commercial banks are now resisting receiving any of the European loans.

Spain and its European partners have not yet drawn up a memorandum of understanding for the deal. Many basic aspects of the loan also remain under discussion, even though Mr. de Guindos, the Spanish economy minister, has already said that Spain will receive “very favorable” terms for the European loan.

Among the few certainties is that the emergency loan will be channeled to the banks through the Fund for Orderly Bank Restructuring, which Spain set up in 2009 and has already used to wipe out the losses of some smaller collapsed banks.

The Spanish deal comes at an awkward time because Europe is in transition to a new emergency funding program, making it uncertain exactly how and when the money will be disbursed to Spain. Some holders of Spanish bonds are worried that Europe’s loan will be given seniority over existing government debt. The new fund, known as the European Stability Mechanism, goes into effect next month and guarantees that its creditors have preferred status to other bondholders.

And even though Madrid obtained a much cheaper European lifeline for Spain’s troubled banks than it could have raised on the debt markets, opposition politicians are blaming Mr. Rajoy for letting the banking crisis spin out of control in the first place.

Mr. Rajoy, however, has turned down calls to answer such criticism before Parliament. His next scheduled appearance there is in the second week of July.

“What is there to make of somebody who has enough time to watch a soccer match but not to appear before Parliament?” asked Mr. Sala-í-Martin, the Spanish economist.

It is a view shared by many Spaniards.

“I don’t understand whether such a rescue will really save the banks, but what I do know is that the only ones who will be forced to tighten their belt again will be ordinary taxpayers,” Cristina Senac Amigo, a 42-year-old hairdresser, said Tuesday.

“And if you’re telling your people to prepare for a disastrous year, you don’t then leave to watch a game — however much we all love soccer and want Spain to win.”