June 11, 2012 in Nation/World

Spain’s bailout gives euro breathing room

Troubles in Europe are unsettling markets globally
Paul Wiseman Associated Press
 
Associated Press photo

Demonstrators hit pots and make noise during a protest Sunday against the financial crisis in Madrid.
(Full-size photo)

Jobless rate

At 11 percent, unemployment in the eurozone is at the highest level since the single currency was introduced in 1999.

WASHINGTON – A $125 billion plan to rescue Spain’s banks won’t solve Europe’s debt crisis or ease the pain of double-digit unemployment across the continent.

But it is likely to calm financial markets and buy time for European policymakers to work with other weak economies threatening the stability of the 17 countries that use the euro.

Europe still has plenty of troubles to address in the three other countries that have already received financial help: Greece, Portugal and Ireland. In Greece, voters could elect a government next week that will refuse to live up to the terms of the country’s $170 billion rescue package. Portugal is combating a toxic combination of high debt and 15 percent unemployment. Ireland is cleaning up a banking mess a lot like Spain’s. Then there’s Italy, the eurozone’s third-largest economy, where government debt is piling up as the economy stagnates.

“We still have some pretty fundamental problems to solve,” said 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 countries that use the euro for money to rescue its banks, which have been crushed under the weight of bad real estate loans. The finance ministers responded by offering up to $125 billion in loans that the Spanish government could funnel to banks.

The plan eases an immediate crisis in the eurozone’s fourth-largest economy. The deterioration of Spain’s banks and the pressing need for a rescue was threatening to bankrupt its government. That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland.

“This move brings into sharp relief the enormous amount of money that will be needed to cordon off the rest of the eurozone periphery in the event of a Greek meltdown,” said Eswar Prasad, professor of trade policy at Cornell University.

The rescue money for Spain will come from pools set up by other euro countries. Spain’s government will distribute it to the banks. The banks will pay it back with interest, and the money will go back to the rescue pools. Interest rates and other details had not been revealed as of Sunday.

Spain has already agreed to government belt-tightening. More austerity likely would have pushed Spain, already suffering from near-25 percent unemployment, deeper into recession.

“You don’t want an economy of that magnitude going down the tubes,” said Daniel Drezner, a professor of international politics at Tufts University in Medford, Mass. Spain has the world’s 13th-biggest economy, more than four times the size of Greece’s. It is the fourth-largest economy in the eurozone.

In recent weeks, jittery investors had demanded higher interest rates on Spanish bonds. If Spain had tried to borrow money in the bond market to rescue its banks, investors would have demanded a much higher interest rate than the favorable deal the banks are getting from their euro neighbors.

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. So the plan unveiled Saturday eases pressure on the United States and the rest of the world economy as well.

“Anything that calms European markets is good for the United States,” Drezner said.

The Spanish deal also gives European policymakers more time to strengthen the euro. They are already planning to create a “banking union” with a centralized regulator, a bailout fund and deposit insurance that covers savers across Europe.

Europe still needs to find a way to stimulate economic growth across the continent so that European countries can begin to grow their way out of their debt problems.

Despite the bank deal, Spain’s grinding economic misery will get worse this year, Prime Minister Mariano Rajoy said Sunday. The conservative prime minister said the economy will shrink by 1.7 percent this year and more Spaniards will lose their jobs, even with the help.

“This year is going to be a bad one,” Rajoy said.

© Copyright 2012 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

Get stories like this in a free daily email


Please keep it civil. Don't post comments that are obscene, defamatory, threatening, off-topic, an infringement of copyright or an invasion of privacy. Read our forum standards and community guidelines.

You must be logged in to post comments. Please log in here or click the comment box below for options.

comments powered by Disqus