Twelve days after Spain insisted it required no bailout, and roughly 24 hours after it vigorously maintained that no decision on such an intervention had been made, the government of Spain today requested a rescue of its troubled banks from the E.U. Although the exact amount that Spain will request and the terms under which it will be delivered have yet to be determined, the euro zone’s Finance Ministers agreed in an emergency meeting this afternoon to recapitalize the Spanish banking system with up to 100 billion euros, making it the fourth country in the E.U. to receive a bailout. Just don’t call it that.
“The financial support will be directed to the FROB [Spain's Fund for Orderly Bank Restructuring], which will inject it in the financial entities that need it,” said Finance Minister Luís de Guindos in a press conference this afternoon. “It is a loan with very favorable terms, much more favorable than the market’s. In no way is this a bailout.”
That’s pretty much the answer you’d expect from a government that has repeatedly asserted it did not need a rescue. On May 26, one day after Spain’s fourth largest bank admitted it would need a total of 23.5 billion euros in public funds, Prime Minister Mariano Rajoy said at a press conference that “there would be no bank bailout.” Earlier this week, the situation had worsened enough that he was forced to admit that Spain’s banks needed European assistance. But even as late as Friday afternoon, his government was insisting it would not request that assistance until it had the results of three audits, one from the IMF, due Monday, and two from independent evaluators, due later this month.
Yet the rest of Europe was unwilling to wait that long. Potentially destabilizing Greek elections are scheduled for June 17. And, at the same time, everyone was acutely aware that the euro itself was in peril so long as Spain’s economy — the euro zone’s fourth largest — was in doubt. In an effort to get Spain to the table sooner, the IMF bumped up the release of its report by 48 hours. That evaluation estimates that the country will need at least 40 billion euros to safeguard its banks, and possibly quite a bit more as a safety margin. With Spain’s economy expected to contract 1.8% this year and access to credit through the markets diminishing by the day, Madrid was forced to admit it simply couldn’t come up with the money itself.
So why won’t its government call the intervention a bailout? Part of the answer surely has to do with the stigma attached to the term. In the three countries that have preceded Spain into bailout territory — Greece, Ireland and Portugal — assistance not only brought with it new financial demands from the so-called troika (made up of the E.U., the IMF and the European Central Bank) but also came with political strings attached, including painful reforms on pension, tax and labor. So painful, in fact, that each of the governments that requested the rescues has fallen.
Spain has also tried to use its resistance to win more favorable terms, and in that, it may have succeeded. Unlike the three other rescues, this one is not directed at the country’s sovereign debt, only its banking sector. Although the government will hold ultimate responsibility for the loan, the funds will be dispersed by the intermediary FROB, which allows the government to avoid adding to its sovereign debt, and the money will be injected only into those banks that need it. Any European and IMF oversight — the latter will not be contributing funds but will be involved in monitoring their use — will be restricted to the financial sector, not the Spanish macroeconomic system as a whole. “In the sense that it’s a lot of money — more than Portugal and Ireland got — it’s a rescue,” says José Luís Peydro, a professor of economics at Barcelona’s Pompeu Fabra University. “But it doesn’t have the same conditionality as those others. It’s a matter of semantics, but it’s also very positive for Spain.”
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Not everyone sees it that way. Barcelona-based economist Edward Hugh says, “Of course it’s a bailout. What else would you call it? If you can’t finance your debt and you have to ask someone else to finance it, it’s a bailout. But everybody who’s taken a bailout is dead, and Rajoy doesn’t want to be dead.”
By avoiding European-imposed austerity measures, Rajoy’s government does indeed hope to avoid that fate. But its equivocating may bring another kind of damage. All three of Spain’s major newspapers ignored de Guindos’ finessing and put the word bailout on their home pages soon after the news broke on Saturday. Twitter has been awash today with links to the Prime Minister’s earlier disavowals of European aid; #rajoycobarde (“cowardrajoy”) was a trending topic. “This reversal is going to hurt him a lot,” says Antoni Gutiérrez-Rubí, a public-image consultant. “He hasn’t told the truth because the truth would oblige him to act. And that has eroded Spaniards’ trust in him.”
Whatever it’s called, the intervention carries with it plenty of questions and risks. Peydro will be looking to see if the terms of the arrangement require the Spanish banking sector to pay back “super seniors” (that is, privileged heavyweight lenders like the IMF or, in this case, the E.U.’s rescue fund) first — a measure that in the past has discouraged private investors. And Hugh, who says this package will only cover the banks’ losses for 2012 and ’13, not “what is causing those losses,” believes today’s rescue is only a first step. “Housing prices are going to continue to fall, unemployment is going to continue to rise, and Spain is going to eventually need some kind of macroeconomic plan to solve that. But the government knows they can’t sell that to the Spanish public yet.”
And thus the insistence on a mere “loan.” As if to prove that nothing has changed, Rajoy, who has not yet made a public statement about the intervention, has maintained his plans to travel to Gdansk, Poland, on Sunday for the Spain-Italy match in the Euro 2012 championship. At least there, he knows, Spain has a good chance of coming out O.K.