6 questions about the Spanish bailout deal
On Saturday, Spain followed the paths of Greece, Ireland and Portugal and became the fourth eurozone country to agree to take part in a financial bailout, and the largest country to do so.
Seventeen eurozone countries have agreed to cough up a considerable amount of money to help out Spain's ailing banking system. Here are some answers to questions raised regarding the financial package:
What did Spain get?
Nothing yet. On Saturday, the 17-nation eurozone finance ministers agreed to make a loan of up to 100 billion euros available to Spain. But the Spanish government has said it is waiting for the results of two independent audits of the country's banking industry before it requests a specific amount.
The bailout loans will most likely come from the European Stability Mechanism, a rescue fund created to provide financial assistance to euro-area member states. The money will be paid into the Spanish government's Fund for Orderly Bank Restructuring (FROB) and will be supervised by the European Commission, the European Central Bank and the IMF.
In a report it released late last week, the International Monetary Fund estimated Spain needs at least around 40 billion euros.
"The amount is basically arbitrary," Andreas Park, a University of Toronto associate professor in economics, told CBCNews.ca."Basically what they're trying to say is that we're just asking for enough."
What's the status of Spain's economy?
Spain's economy is the 13th largest in the world, with an estimated 2011 GDP of 1.1 trillion euros. But the economy is currently in a recession, the second in three years. As well, the unemployment rate hovers around 25 per cent.
However its debt as a percentage of GDP, 68.5 per cent, is relatively low compared to some of its European neighours. Greece's debt to GDP ratio is 165 per cent and Portugal's is 108 per cent. Even Germany's debt to GDP ratio is higher, at around 81 per cent.
Why did Spain need a bailout?
Similar to the United States and Ireland, Spain too suffered a collapse in the housing market. During the boom years, from 2004 to 2008, housing prices rose 44 per cent, according to the BBC. But since the burst, prices have plunged, up to 30 per cent by some estimates. This left some banks with a number of delinquent real estate loans, reducing its overall capital and putting at risk its ability to issue loans.
"As people refinance their mortgages and can't make their loan payments anymore and more people lose their jobs, more and more loans are becoming bad loans. This is why these banks are deteriorating." Parks said. "So what you need to do is recapitalize these banks."
Last month, the credit ratings agency Standard & Poor’s downgraded the ratings of a number of banks. In March, Spain’s bad debt ratio rose to 8.3 per cent, the highest in 17 years.
S&P has said the Spanish banks could see losses ranging from 80 billion euros and 112 billion euros by the end of next year.
Why couldn't the Spanish government bail out its own banks?
The U.S., the UK and Germany were able to inject their own capital into their troubled banks. But the recession means reduced tax revenue. As well, investors are requiring a higher interest rate to make new loans to Spain, making it much more expensive for the country to pay off its own debt.
"Spain has trouble as a country to do the capital injection directly," Parks said. "It's hard for them to raise capital as it is, and so to recapitalize their banks, it would have to raise further capital."
How does the Spanish bailout rank with other eurozone countries?
While Spain's bailout package is larger than Ireland (67.5 billion euros) and Portugal’s (78 billion euros), it’s much smaller as a percentage of its overall economy, which is larger than Greece, Ireland and Portugal combined.
It's also smaller than Greece's, which received two bailout packages — a 110 billion euro loan in the first May 2010 rescue package and a February-March 2012 deal that gave Athens another 130 billion euros in loans.
Unlike the bailouts for the other three euro countries, which went to help their respective public finances, the Spanish bailout is going directly to its banks.
This also means that the austerity strings usually attached to such agreements does not apply to the Spanish government, although the banks will be under certain conditions.
Will the money ever be repaid?
"There's a distinct possibility that these funds will be repaid so that it's not money down the drain," Parks said. "If you give the money to Greece, it's money down the drain. If you give it to the Spanish banks, it's a good possibility that a sizable portion of this money will be repaid."
Parks added that some people who repay some of these mortgages will be repaid over a long period of time.
With files from The Associated Press