Options and Conditions for a Spanish Bailout
Video Transcript:
Video Transcript:
The Spanish Minister of Economy Luis de Guindos said on Dec. 26 that the Spanish government may seek help from the European Central Bank next year. According to the minister, Madrid does not currently need that help, but it could in the future if Spain's borrowing costs remain high.
The support mechanisms allow Spain to apply for three different types of European aid. First, Madrid could request a precautionary credit line, which could be activated in case of emergency.
Spain could also seek a full sovereign bailout, similar to the ones that were granted to Greece, Ireland and Portugal. Finally, Spain could request the purchase of its bonds by the European Central Bank. This third alternative is the one that was suggested by de Guindos.
Madrid managed to meet its funding targets for 2012 without direct help from the European Central Bank. However, Spain is borrowing at high interest rates, which may be unsustainable in the long term. In this context, Spain could ask the European Central Bank to buy Spanish bonds in the secondary markets to reduce its borrowing costs. This operation would be carried out through the European Stability Mechanism, the permanent bailout fund that the EU activated this year.
The Spanish government has declared that this kind of bailout would be different to those that were granted to other eurozone countries in the past. But the EU has made it clear that before receiving any assistance, Madrid would need to sign a memorandum of understanding with the European Union -- a document that would request Spain to maintain the current path of fiscal discipline, or even apply new austerity measures.
Spain has already received financial assistance from the EU this year. In July, the European Union offered Madrid up to one hundred billion euros to rescue its banking sector. So far, Spain has only requested about 40 billion that were used to restructure four of its weakest banks.
This assistance came in the midst of a highly complex political, social and economic situation in Spain. The country is currently going through its second recession in three years and its economy is expected to contract further in 2013. One in four Spaniards are unemployed, and social unrest has been growing since the beginning of the crisis. At the same time, the autonomous region of Catalonia recently announced that it will seek to organize a referendum for its independence in 2014.
Like most countries affected by the crisis in Europe, Spain has to deal simultaneously with domestic political instability and increasing pressure from international markets. The European Union, meanwhile, is struggling to find a balance between keeping political pressure over Madrid and offering help. This year, Madrid was pressed by Brussels to implement tough austerity measures but also received financial assistance and softer deadlines to meet its deficit targets.
Should Madrid request financial assistance from the European Union next year, Brussels would probably grant it, looking to prevent a contagion of the financial instability to other economies of the eurozone. However, the assistance would not be for free -no matter what the Spanish government says. In the case of a bailout, the debate between Madrid and Brussels would not be about the existence of conditions, but about their scope and targets.
