11 Jun 2012

Spanish banks bailout: your questions answered

With a 100bn euro rescue of Spain’s banks agreed, Channel 4 News looks at the deal Madrid has struck with its European partners and the implications for Greece and Ireland.

The bailout, which aims to address a crisis in the Spanish banking sector caused by bad loans on property, initially lifted share prices on Monday, but Europe’s problems are far from over.

Even if Spain is successfully propped up, Greek voters go to the polls on 17 June following inconclusive election results on 6 May. Left-wing parties opposed to the terms of Greece’s bailout reaped dividends last time around and they are expected to build on their success in six days’ time.

Assuming that happens, Athens will no doubt lean on other eurozone countries and the International Monetary Fund (IMF) to water down the austerity measures the country has been told to implement in return for financial assistance.

If a solution is not found, Greece could find itself forced out of the single currency, potentially threatening the future of the euro. But for now it is Spain that is occupying people’s thoughts.

Where is the money coming from?

The eurozone’s permanent bailout fund, the European Stability Mechanism (ESM), has not been established yet, so the assumption is that the money for Spain will come from the European Financial Stability Facility (EFSF).

Britain does not contribute to either fund because it is not a member of the single currency.

Why does this matter?

In the event of a default, loans from the ESM are given precedence over those from commercial lenders. This is not the case with money from the EFSF.

Finland, which contributes to the EFSF, looks as though it may ask for collateral from Spain in return for its portion of the loan. This is what it did with Greece. It is unclear exactly what it received, but there was a deal with Greek banks.

Is there enough money in the EFSF for Spain?

At first sight, yes. The fund started out with 440bn euros and there are 250bn euros left. Madrid is in line for 100bn euros, but the think tank openeurope believes more is likely to be needed in the future.

It estimates that four banks – Bankia, Banco de Valecia, Novagalicia and Catalunya Caixa – will swallow up 50bn euros, “leaving only 50bn euros for the rest of the huge banking sector”.

With 140bn of “doubtful loans” factored in, “a total 400bn euro exposure to the bust real estate and construction sector”, and a predicted 35 per cent fall in property prices, openeurope’s head of economic research, Raoul Ruparel, says the remaining 50bn euros will not cover these losses.

Which other countries have received money from the EFSF?

Ireland, Portugal and Greece have all received money from the EFSF and other sources.

Ireland, the first country to be bailed out, received 67bn euros – a third from the EFSF, a third from the EU as a whole and the remainder from the IMF.

Portugal was given 78bn euros by the EFSF, EU and IMF in the same proportions as Ireland.

In its first bailout, Greece received 110bn euros in loans from other eurozone countries. Its second bailout, of 130bn euros, came from the EFSF (two thirds) and IMF (a third).

Has Britain contributed?

Britain contributed to the Irish, Portuguese and second Greek bailouts, largely by offering guarantees rather than spending cash.

These guarantees currently amount to 11.5bn euros, but Britain has also made a bilateral loan to Ireland of 3.8bn euros. It is not contributing to the Spanish bank rescue.

Does that mean Britain is off the hook?

No. British banks lend to Spain and obviously want their money back with interest. According to figures from the Bank for International Settlements from December 2011, a total of $83bn has been loaned to Spain: $4.4bn to the government, $12.9bn to banks, and $65.8bn to the private sector.

Why is Spain being treated differently from Ireland and Greece?

Eurozone countries are not seeking to impose any more harsh economic medicine on Spain on the basis that Madrid’s problems are concentrated on the banking sector, rather than the entire economy.

The condition-free loans also take account of the fact that Spain has already embarked on an austerity programme of tax increases and spending cuts. As such, it has not had to agree to a programme of structural reforms.

Nor, unlike Greece, will it have to endure regular check-up visits from the IMF, European Central Bank and European Commission.The IMF will monitor Spain’s bank restructuring, not the Spanish economy.

Many of Ireland’s problems have been centred on its banks and although Dublin is not currentlly requesting a renegotiation of its bailout terms, Raoul Ruparel thinks it would have a strong case for doing so. This would involve more leeway for extra public spending to boost growth.

In contrast, Greece’s problems are spread across the whole economy, but that has not stopped all of the major Greek parties contesting elections on 17 June to call for renegotiation of the conditions of its bailout.

Mr Ruparel believes these terms are “unrealistic” and that there will be some renegotiation in the short term before Greece leaves the euro.