Spain Doesn’t Want a Bailout — Just Send Money. Now!

Hesitant to apply more austerity, the fourth largest economy in the E.U. could get what it wants — direct injection of funds into its banks, not a bailout. It may just be too big to fail

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Denis Doyle / Bloomberg / Getty Images

The Spanish flag, left, and the E.U. flag are seen outside a building in Madrid

Even good news isn’t enough nowadays in Spain. The government in Madrid on Thursday successfully auctioned $2.5 billion worth of debt — and it didn’t really matter. In a country where each new day seems to bring one more grim revelation about the extent of the financial crisis, the news that bidding was strong and the government managed to sell slightly more than it had expected was certainly welcome. But the sale did little to change the growing consensus that Spain required some form of rescue from Europe. And that it needs it imminently.

“There is a positive aspect to the sale — demand was high — and a negative aspect, which is that the yield was too,” says José Luis Peydró, professor of economics at Barcelona’s Pompeu Fabra University, referring to the 6.04% interest rate on 10-year bonds. “But neither changes the fact that Spain is going to need some kind of intervention.” Indeed, that assessment was reinforced later on Thursday by a dramatic three-step downgrading of Spain’s sovereign debt, from A to BBB, by the Fitch ratings agency.

The pressing question now is what form the intervention will take. Germany has begun to openly pressure Spain into requesting a national bailout of the sort taken by Greece, Portugal and Ireland. Yet Prime Minister Mariano Rajoy continues to insist that Spain does not require, and will not accept, a full-bore rescue. Although he admitted on Tuesday that Spain’s banks needed European help, he has instead requested that the aid come in the form of a direct injection of capital into Spain’s ailing banks. (Last week, the country’s fourth largest bank — already partially nationalized — requested an additional $24 billion in public money.)

June looks to be a tense month. Finance Minister Luís de Guindos has said Spain will not ask for a specific amount for its banks until it has the results of an IMF evaluation — expected on Monday — and those of two independent evaluators, which will likely come about a week later. (Reuters reported on Thursday that the IMF report will recommend a $50 billion injection of funds for Spain; Madrid has not confirmed the claim.) Greek elections are on June 17, and the euro-zone Finance Ministers are scheduled to meet four days after that. If a solution were in the works, that would be the time to hammer it out. But any broader solution to the crisis, in the form of Europewide fiscal reform, will surely take much longer. “Spain can withstand the pressure for a while, but not forever,” says Peydró. “The sooner this ends, the better it will be for everyone.”

The kind of injection Rajoy wants would require changing E.U. law. But more than any legal jostling, the disagreement really stems from anxiety about the strings — what kind and how strong — that come attached to aid. Germany has long insisted that banks are the responsibility of their sovereign governments, not the E.U., and has used rescue instruments to enforce austerity measures on the receiving countries. Spain, which sees itself as having already made difficult cuts, is loath to have more forced upon it.

In the past week, both the European Commission and France have expressed tentative support for the kind of soft bailout that Spain envisions. And even Germany has shown itself willing to consider a third way: by directing money toward Spain’s Fund for Orderly Bank Restructuring — as long as certain yet-to-be-determined conditions were met. What exactly those conditions would be, and whether they would entail the kind of guarantees and loss of budget sovereignty that the Spanish government hopes to resist, remains to be seen. But it does suggest that perhaps, just perhaps, the two sides are inching toward compromise.

Why the slight rapprochement? In part it’s because countries outside the euro zone are feeling the effects of the crisis. “In the past week, China, the U.S. and the U.K. have all urged Europe to resolve the situation as soon as possible because they’re suffering too,” says José Carlos Díez, chief economist at Spanish brokerage InterMoney. “That pressure is helping Spain get a better deal.”

So too, ironically, is the seeming consensus that Europe’s fourth largest economy desperately needs help. Now that both Brussels and Berlin agree that — without assistance — Spain faces the possibility not only of default but also of pulling the entire euro zone down with it, a certain openness to changing the rules appears to be emerging. Adamant that his country not be saddled with the stigma of a sovereign-debt bailout, Rajoy is using this erstwhile advantage to press instead for Europewide reform in the shape of common fiscal policy and a central bank willing to do what it takes to assure the markets that the euro will not fall. “There’s definitely a kind of brinkmanship going on,” says Luis Garicano, economist at the London School of Economics. “But the risks are high. It’s like playing chicken with a tank.”

It doesn’t hurt Spain’s cause that the three other national bailouts have not really worked. There is a growing recognition that the harsh austerity measures required by the rescue packages to Greece, Ireland and Portugal have stymied growth and made it ever harder for those countries to meet their debt obligations. The bailouts, says Garicano, have driven away private investment. “Instead of the market opening up, access to credit from investors closes because those individuals all think they’re going to be last in line to get their money. It becomes a ‘Hotel California’ situation — you can get in, but you can never leave.”

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