Spain has secured a eurozone lifeline of up to 100 billion euros ($125 billion) to save its stricken banks, earning worldwide praise for steadying the European and global economies.
After an emergency video conference lasting more than two hours on Saturday, the 17 eurozone finance ministers issued a statement saying they were “willing to respond favorably” to a Spanish plea for help.
The deal − hailed by Germany, France, Japan and the United States as well as the IMF − marks a dramatic climbdown for Spain, which had hotly denied any need for outside aid.
Defying all efforts by policymakers, the eurozone emergency has now spread to the region’s fourth-biggest economy − Spain’s is twice the size combined as those of Greece, Ireland and Portugal, the countries bailed out so far.
Prime Minister Mariano Rajoy’s conservative government finally bowed to pressure from world leaders and, more importantly, the markets, which have sent Spanish borrowing costs soaring.
“The Spanish government declares its intention to solicit European financial help for the recapitalization of those banks that need it,” a visibly tense Economy Minister Luis de Guindos told a news conference.
De Guindos refused to describe the aid as a rescue deal, which his government had categorically ruled out.
“This has nothing to do with a rescue,” he insisted, arguing that the aid imposed no new conditions or austerity measures on the broader economy and was limited to the weakest 30 percent of the banks.
He conceded, however that the deal will further increase Spain’s mushrooming public debt.
Nevertheless, the eurozone ministers said they were confident Spain would honor commitments to cut the deficit and restructure the economy. “Progress in these areas will be closely and regularly reviewed,” they said in the statement.
Most of the Spanish newspapers’ front pages headlined with the word “Rescue”, though some sought so soften the blow. “Rescue without humiliation,” insisted the conservative daily El Mundo.
World economic powers welcomed the deal.
Japanese Finance Minister Jun Azumi said it was a “major first step” toward stabilizing the European and global economies.
U.S. Treasury Secretary Timothy Geithner said the moves were “important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.”
French Finance Minister Pierre Moscovici said that by restoring confidence in Spain’s banks, “this accord will help promote the return of growth in Europe”.
German Finance Minister Wolfgang Schaeuble hailed Spain’s “determination” to recapitalize the banks.
In Washington, IMF managing director Christine Lagarde said she welcomed the Eurogroup decision to provide a “credible backstop” to the Spanish banking system.
Spain finally sought aid as the cost of fixing banks’ balance sheets, heavily exposed to a property bubble that burst in 2008, spiraled in past weeks.
Recently nationalized Bankia, which has the largest exposure to real estate, needs an extra 19 billion euros to repair its books in addition to 4.5 billion euros already injected by the state.
Under Saturday’s deal, up to 100 billion euros would be provided by the European rescue mechanisms to recapitalize Spanish banks, the eurozone ministers said.
Spain thus becomes the fourth country to receive financial aid since the eurozone sovereign debt crisis erupted two years ago.
“So we have a new concept. A ‘lite’ bailout with no material conditions on the sovereign and instead merely the banks that apply,” Lloyds Banking Group economist Charles Diebel said in a report.
“This is the latest in the long list of euro measures to stem the crisis. Will it be enough? That’s questionable as it is still prevention rather than cure and again only keeps the banking sector alive rather than really supporting growth.”
The scale of the aid depends on an external audit being carried out for Madrid by consultants Roland Berger and Oliver Wyman. The audit is due by June 21 but de Guindos said it would ready within a few days.
Spain’s economy minister stressed that the 100 billion euros included a big safety margin.
“This announcement is good news for the Spanish economy and for the future of the eurozone,” he said.
International Monetary Fund bank stress tests, unveiled Friday three days ahead of schedule, determined that Spanish banks need about 40 billion euros in new capital.
But an IMF official noted that the banks would need more than that to build a “credible firewall.”
The assistance is to be channeled through Spain’s state-backed bank Fund for Orderly Bank Restructuring, eurozone policymakers said.
The eurozone hopes the rescue will satisfy financial markets and put Spain in a safe harbor ahead of the Greek elections on June 17, which risk leading to a destabilizing exit from the eurozone.