Eurozone crisis: the Spanish bailout and the Greek elections

Updated On: Jun 13, 2012

 This past Saturday, Spain became the fourth Eurozone country to request a EU bailout for its banking industry. Yet the €100 billion loan is only a temporary solution, meaning Madrid may need to seek further international financial help.

Although the money will ultimately benefit the banks, the Spanish government is responsible for distributing the money, which means that the government will be responsible for guaranteeing the loan, adding to the already ballooning debt. Furthermore, although it is currently unclear which euro fund—likely the new European Stability Mechanism (ESM)—will lend the €100 billion, the European government creditors will likely have preferred creditor status, making potential private investors more wary of buying the sovereign debt.

Credit rating agency Fitch warned that even if Spain only used €60 billion of the bailout loan, Spain’s debt will be “on a trajectory to peak at 95 percent of G.D.P. in 2015,” an unsustainable and dangerous level of national debt.

"The market “bounce” from Spain’s bailout package was predictably short-lived," said SIIA Council Member Ho Seng Chee. "Pouring money into Spanish banks was never going to do much for the Eurozone crisis."

Mr. Ho added: "In a speech delivered yesterday in Berlin at the Economic Conference 2012, Singapore DPM and Finance Minister Mr. Tharman Shanmugaratnam put it succinctly: the key to getting Europe back to self-sustaining growth is to co-ordinate and implement both austerity and stimulus measures. Mr. Tharman is the current Chairman of the IMF’s policy steering committee. His comments may be seen as a renewed plea by the IMF and senior policy makers for Europe to act decisively and forcefully."

Spain’s bailout deal has also become the center of focus in the new Euro zone battleground in Greece before this Sunday’s national vote. The June 17 elections have become a de facto vote on whether Greece will stay or leave the EU.

New Democracy leader Antonis Samaras said that the deal showed how important it is for the country to remain inside the European Union, negotiate with its partners over the country's problems and not isolate itself. On the other hand the radical leftist Syriza party leader Alexis Tsipras said it showed that the only prosperous route for Greece is to reject the terms of the country's own massive bailouts.

If Greece stays, it must implement the austerity measures required under the terms of their bailout. If Greece leaves and renounces its bailout terms, Greece’s international lenders could stop providing the rescue loans that Greece depends on. Greece will need to start printing its own currency, the drachma, which will lose half or more of its value relative to the euro almost immediately. This would drive up inflation, lower the purchasing power of the average Greek, decrease economic output, and further raise unemployment rates.

Greece’s departure would likely drive up borrowing costs for Italy and other European nations, sparking a credit crunch and potentially leading the nations to also seek bailouts, trapping Europe in a vicious cycle.

Report: Europe's Latest Bailout (June 10, 2012, The Wall Street Journal) 

Report: Bank rescue may not ease Spain's troubles for long (June 11, 2012, Reuters)

Report: Bailout in Spain leaves taxpayers liable for the cost (June 12, 2012, The New York Times)

Report: Greece elections pose a cruicial dilemma (June 11, 2012, The Associated Press)

Report: Bailout for banks figures into campaigns in Greece (June 10, 2012, The Wall Street Journal)

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