MADRID – Spain became the fourth and largest country Saturday to ask Europe to rescue its failing banks, a bailout of up to $125 billion that leaders hoped would stabilize a financial crisis that threatens to break apart the 17-country eurozone.
The rescue offer follows growing pressure from international investors and the Obama administration and comes a week before elections in Greece, whose voters could decide whether the country leaves the euro.
Europe’s widening recession and financial crisis has hurt companies and investors around the world. Providing a financial lifeline to Spanish banks is likely to relieve anxiety in the Spanish economy – which is five times larger than Greece’s – and in markets concerned about the country’s ability to pay its way.
“What the markets are looking for is essentially the Spanish government’s acceptance that its banks are broke,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.
Spanish Economy Minister Luis de Guindos announced the deal after an emergency conference call with eurozone financial leaders. He said the aid will go to the banking sector only and would not come with new austerity conditions attached for the economy in general – conditions that have been an integral part of previous bailouts to Portugal, Ireland and Greece.
The exact figure of the bailout has not yet been decided. De Guindos said the country is waiting until independent audits of the country’s banking sector have been carried out before asking for a specific amount. The audits are expected June 21 at the latest.
De Guindos did say, however, that Spain would request enough money for recapitalization, plus a safety margin that will be “significant.”
With markets in turmoil, de Guindos said the government’s efforts to shore up the financial sector “must be completed with the necessary resources to finance the needs of recapitalization.”
Finance ministers of the 17 countries that use the euro said the money would be fed directly into a fund Spain set up to recapitalize its banks but underscored that the Spanish government is ultimately responsible for the loan.
Still, that plan allows Spain to avoid making the onerous commitments that Greece, Ireland and Portugal were forced to when they sought their rescues. Instead, the group statement said that it expected Spain’s banking sector to implement reforms and that Spain would be held to its previous commitments to reform its labor market and manage its deficit. The statement said that meant the cost could reach $125 billion.
The Spanish acceptance of aid for its banks is a big embarrassment for Prime Minister Mariano Rajoy, who insisted just 10 days ago that the banking sector would not need a bailout. International pressure on Spain to solve its financial problems has grown more urgent in recent weeks. On Thursday ratings agency Fitch hit Spain with a three-notch downgrade of its credit rating. That left it two levels above junk status. Then on Friday, Moody’s Investor Services warned it could downgrade Spain and other countries in the eurozone.
The International Monetary Fund early Saturday released a report estimating that Spanish banks need a recapitalization injection of at least $50 billion following a stress test it performed on the country’s financial sector. That report came out three days ahead of schedule, underscoring the urgency of the situation.
And President Barack Obama, facing re-election, enduring a weak economy and in need of strong trading partners, expressed strong concern late Friday over the European economic crisis.
U.S. Treasury Secretary Timothy Geithner welcomed Spain’s decision and the offer of European support, describing them as “important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.”
Spain’s financial problems are not due to Greek-style government overspending. The country’s banks got caught up in the collapse of a real estate bubble. However, as Spain’s leaders have struggled for a solution to their banking crisis, the country’s borrowing costs have soared close to the level that forced the governments of Greece, Portugal and Ireland to seek rescues.