Well, that was fast. Only 10 days after Spanish Prime Minister Mariano Rajoy declared emphatically that “there would be no bank bailout” in his country, it now looks like he may eat his words as soon as Saturday. According to Reuters, which cites two unnamed European Union sources and one German official, euro-zone finance ministers will hold a teleconference on Saturday during which Spain will request a rescue package for its banks. The Spanish government will not confirm or deny the news. “We consider this speculation, and we don’t respond to speculation,” government spokesperson Ana Belén Vázquez tells TIME.
The news comes on the heels of Thursday’s drastic downgrade of Spain’s credit rating by Fitch ratings agency from A to BBB and the government’s auction of 2 billion euros worth of debt. Although the sale was successful in the sense that demand for 10-year bonds was strong, much of that demand came from Spain’s own beleaguered banks.
The pressing question now is what form the financial intervention will take. Germany has openly pressured Spain to request a national bailout of the sort taken by Greece, Portugal and Ireland. Yet Rajoy, who argues that Spain has already done the hard work of reform, is eager to avoid the political fallout and draconian austerity measures that accompany such a rescue. While admitting on Tuesday that Spain’s banks needed European help (Bankia, the country’s fourth-largest bank, requested 19 billion euros in public money on May 25 and two more banks requested a total of 9 billion euros on Thursday), he has maintained that the aid should come in the form of a direct injection of capital into Spain’s ailing banks.
In the past week, it seems that the two sides have been inching closer to a third way, which would entail directing money toward Spain’s Fund for Orderly Bank Restructuring. That solution would avoid a bailout of Spain’s sovreign debt and focus solely on its bank problem, but would still require the government to make a formal request to the European Union for assistance and would give the bloc some oversight over Spanish financial affairs. The conditions of such a deal would still need to be worked out, but they could limit European oversight solely to the Spanish financial sector, which would allow the Spanish government to save some face by avoiding a more far-reaching loss of sovereignty. Both the European Commission and France have expressed tentative support for this kind of “soft” bailout.
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 the 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 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 slight advantage to press instead for Europe-wide 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, an 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 in Europe have not really worked. There is a growing recognition that the harsh austerity measures required by the rescue packages for 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.”
How much would a bank bailout entail? On Thursday, Rajoy said Spain would not ask for a specific amount for its banks until it had the results of an IMF report on the Spanish banking sector’s financial situation, scheduled to be released on Monday, and reports by two independent evaluators, which will likely come about a week later. But on Thursday, Reuters reported that the IMF report will recommend a 40-billion-euro injection of funds, and on Friday, the Spanish newspaper El País put the sum mentioned in the IMF report at between 25 and 37 billion euros.
Whether it happens this weekend or not, some kind of agreement appears imminent. Certainly there is concern about the Greek elections on June 17, which could lead that country to leave the euro zone if parties opposed to the terms of the E.U./IMF bailout win a large number of seats in Parliament. Antonio López-Isturíz, secretary general of the European Popular Party and member of the European Parliament for Rajoy’s Popular Party, is confident that an arrangement will be reached by June 28, when E.U. leaders have scheduled another emergency summit.
“It always works this way with the European councils,” he says. “Everyone starts from a hardline position, like football coaches talking smack. But then their positions soften. When it really comes down to it, everyone becomes more flexible.”