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Spain's €100bn rescue package 'may buy time'

A ¤100bn plan to rescue Spain's banks won't solve Europe's debt crisis or ease the pain of double-digit unemployment.

But it is likely to calm financial markets and buy time for policymakers to work with other weak economies threatening the eurozone's stability.

Europe still has plenty of troubles in bailout nations.

In Greece, voters could elect a government next week that will refuse to live up to the terms of the country's ¤100bn rescue package. Portugal is combating a toxic combination of high debt and 15pc unemployment, while our own economic situation is still far from rosy.

"We still have some pretty fundamental problems to solve," says Nicolas Veron, senior fellow at the Bruegel think tank in Brusssels. "We need more radical solutions than this one."

Spain on Saturday asked finance ministers for the 17 eurozone countries for money to rescue its banks, which have been crushed under the weight of bad loans.

The finance ministers offered up to ¤100bn in loans to the Spanish government.

The plan eases an immediate crisis in the euro's fourth-largest economy. The deterioration of Spain's banks and the pressing need for a rescue was threatening to bankrupt its government.

"This move brings into sharp relief the enormous amount of money that will be needed to cordon off the rest of the euro zone periphery in the event of a Greek meltdown," says Eswar Prasad, professor of trade policy at Cornell University, USA.

Investors are worried about what will happen when Greek voters go to the polls on June 17.

If Greece reneges on the strict austerity measures that come with its rescue package, it could be forced to abandon the euro.

Greece's departure from the eurozone would likely cause financial chaos across Europe: Greek debts would go from being denominated in sturdy euros to being in Greek drachmas of dubious value.

Worse, a Greek exit would raise fears that another European country such as Portugal or Italy might be next.

"A significant part of this (bailout for Spanish banks) has to do with ring-fencing Greece," said Jacob Kirkegaard, of the Peterson Institute for International Economics, Washington.

"This is enough to prevent added market contagion."

But analysts said even bolder action may be needed.

Germany, worried that it will get stuck with the bill for any ambitious schemes, has rejected several ideas.

It has been reluctant to ease the terms of previous bailouts to reduce the pain of Government spending cuts here and in Greece, Portugal and Ireland.

The troubles in Europe also are causing economic problems for the United States and developing countries such as China and Brazil, which rely on Europeans to buy their exports.

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