LONDON — Two and half years after the start of Europe’s debt crisis, Spain on Saturday became the fourth and by far the largest euro-zone nation to seek an international bailout, with financial leaders from the currency bloc declaring a deal that could inject as much $125 billion into the country’s ailing banks.
The humbling request — by a nation of 47 million that sought to fend off the embarrassment of a bailout for months — came as Madrid faced mounting international pressure to cave in and ask for cash. Global leaders, including President Obama and German Chancellor Angela Merkel, had strongly hinted in recent days that the risks of Spanish inaction were mounting, leading to fears that it could result in a full-blown financial crisis, endanger the euro currency union and spark a fresh bout of turmoil on global markets.
Spain's deep economic misery will get worse this year despite the country's request for a European financial lifeline of up to €100 billion ($125 billion) to save its banks, Prime Minister Mariano Rajoy said Sunday. (June 10)
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The lifeline for Spain also was seen as an essential buffer to calm investors ahead of a key vote in Greece on June 17. The elections there could bring to power a new government opposed to the terms of Greece’s bailout, potentially putting that nation’s future in the euro zone in question and becoming a trigger for an escalation of the region’s woes. By inoculating Spain with a bailout, European financial leaders were trying to limit the possible fallout.
In contrast to the near-broken economy of deeply indebted Greece, Spain’s problem is less about the mismanagement of government finances and more about the trials of Spanish banks. Its banking system has worsened in part because of Madrid’s failure to force an earlier cleanup of bad debts stemming from a U.S.-style real estate bust in 2008. Bank balance sheets have since deteriorated as waves of austerity demanded by European leaders as a remedy to the region’s debt crisis tipped more and more Spanish homeowners into foreclosure and Spanish businesses into bankruptcy.
Those problems came home to roost Saturday.
Economy Minister Luis de Guindos announced that his nation would request a bailout to recapitalize a group of ailing Spanish banks. In a bow to Spanish pride, however, de Guindos said the terms of the loan would be “very favorable,” structured much differently from those previously offered to Greece, Ireland and Portugal, leading some to dub it a “bailout lite.”
Spain had initially sought a direct injection of cash into its banks from a $625 billion European fund established to contain the debt crisis. Opponents, led by Germany, shot that idea down, saying nations, not banks, must be ultimately responsible for any money lent.
On Saturday, however, European financial officials agreed to funnel cash directly into a special Spanish government fund designed only for bank aid, offering the six-month-old government of Prime Minister Mariano Rajoy a face-saving compromise.
In addition, the European loan, de Guindos said, would not come with the humiliating independent oversight and demands for fresh government cuts required of Greece, Portugal and Ireland, partly because Spain had already agreed to strict new European Union budget targets. Spanish banks that receive aid, however, will be subject to European and possibly International Monetary Fund oversight.