Spain yesterday bowed to the inevitable and asked euro-region governments for a bailout worth as much as €100bn to rescue its banking system as the country became the biggest euro economy so far to seek international aid.
"The Spanish government declares its intention of seeking European financing for the recapitalisation of the Spanish banks that need it," said Spain's Economy Minister Luis de Guindos yesterday.
A statement by euro-region finance ministers said the loan amount would "cover estimated capital requirements with an additional safety margin".
Minister for Finance Michael Noonan said the move was a collective response by eurozone member states to assist in resolving the difficulties in the Spanish banks.
Just seven months after winning a landslide victory, Spain's Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalise Spanish banks without recourse to external help as a deepening recession forced lenders to recognise spiralling losses. Yesterday's move means Spain has a firewall in case the Greek election on June 17 unleashes a fresh round of market turmoil.
Spain's Economy Minister Luis de Guindos said the terms of the rescue loan were "very favourable" compared with market rates and the funds will be channelled through Spain's FROB bank rescue fund, whose liabilities count as public debt. The maximum amount of the loans is equivalent to about 10 per cent of gross domestic product and interest paid on the loans will affect the deficit, which is the euro area's third-largest.
The FROB will only inject capital into lenders that need it, and Mr De Guindos said many banks won't, as difficulties are concentrated in about 30 per cent of the industry. Lenders receiving aid will be subject to conditions, he said, without giving details. The government won't be forced to take additional measures on the budget or economy.
"The €100bn is the number that we were looking for so I'm cautiously optimistic," Olly Burrows, credit analyst at Rabobank International, said in a telephone interview from London.
"We still have to find a solution to the sovereign debt crisis: it's not done yet and we still have to press on with the task of uniting Europe."
European officials have failed to get their arms around a debt crisis that started in Greece at the end of 2009 and has now claimed the euro region's fourth-largest economy. The bailout adds to the €386bn in pledges to Greece, Ireland and Portugal that European governments and the IMF Fund have made since 2010.
Mr De Guindos denied he had faced pressure from European officials to seek aid, a week before elections in Greece that risk prompting the country's exit from the euro. European Central Bank council member Ewald Nowotny said yesterday that any delay on Spain's part in requesting aid would increase the costs of a rescue.
Spain's banks are hobbled with more than €180bn of bad property loans and assets stemming from the collapse of a property boom that was the country's main driver of economic growth.
Still, the agreement may spur further downgrades in the nation's credit rating. Moody's, which grades Spain at A3, said that as the nation moved closer to needing external help "the increased risk to the country's creditors may prompt further rating actions".
Finland will demand collateral for the loans if they come from the temporary European Financial Stability Facility, the Finnish Finance Minister Jutta Urpilainen said.
Ministers haven't decided whether that fund or its permanent successor, the European Stability Mechanism, will be used. Should the ESM provide the funds, the loans would be senior to outstanding government debt, given Spain's EU lenders protection at the expense of bondholders.
Mr Rajoy said as recently as May 28 that there would be no bailout for the nation's lenders.