Spain Asks for Help, Gets $125B for Banks

On Sunday, Spain became the largest of the euro-zone countries to request a bailout, and European finance ministers agreed that banks of the beleaguered nation could receive up to $125 billion, or 100 million euro, in funds to keep them afloat.

On Sunday, Spain became the largest of the euro-zone countries to request a bailout, and European finance ministers agreed that banks of the beleaguered nation could receive up to $125 billion, or 100 million euro, in funds to keep them afloat. Prime Minister Mariano Rajoy took steps to avoid using the word “bailout” in connection with the funds—preferring to call the money a “line of credit” —but also noted that “this year is going to be bad one.” Spain is also facing a near 25 percent unemployment rate across all age groups, but perhaps most startling is the 51 percent rate for job seekers under the age of 25.

The 17-member Eurogroup, of which Spain is a part, said on Saturday that it was prepared to lend up to $125 billion, which will come from one of the three pools of emergency financing available to member nations. The money will be sent to Spain’s Fund for Orderly Bank Restructuring, which will then use the money to undergird the country’s wobbling banks.

According to a report by Bloomberg, German Finance Minister Wolfgang Schaeuble said Spain’s debt-to-GDP ratio was more favorable that even Germany’s, with Spain at 78 percent of GDP and Germany’s at 82 percent. “Spain is making the necessary reforms to improve its competitiveness and to limit its fiscal policy to a sustainable deficit. By the way, Spain’s overall debt (ratio) is lower than Germany’s,” Schaeuble said.

But while the banks may be receiving a temporary infusion to keep things moving, the country itself still faces a crisis. In early May, Spanish bank Bankia—the largest of several institutions saddled with too-large mortgage losses after the bursting of the construction bubble—was nationalized, but still requested $24 billion of additional capital.

Rajoy further predicted that Spain’s economy would still contract the previously expected 1.7 percent in 2012 despite the help.

Bond markets over the weekend rallied behind the welcome news, with Spanish and Italian bond yields falling after the deal eased fears of a run on Spanish banks. But the situation hasn’t fully resolved, which could possibly lead to a fizzling, short-lived market recovery that could be exacerbated by the next crisis in the euro zone.