Editor’s note: This article was first published in June 2012. This news piece was written on 8-10 June 2012, as the eurozone rescue of Spanish banks was being agreed. The 23% unemployment rate, the forecasts on the risk premium, stock market, tax rises, privatisations and cuts all reflect that moment.
Update, 10 June 2012
As we argued just yesterday, the rescue of the Spanish banks has finally gone ahead, so it’s time to explain how the new situation will affect Spaniards’ pockets.
To begin with, Europe hasn’t demanded many conditions, so the euphemism of “aid” or “European financing” could indeed be used. That means the cuts and adjustments may not be as harsh as those demanded of Greece, Iceland or Portugal, but we should expect that there will be more cuts.
In some respects, this European intervention in the Spanish banks will have a positive effect on the markets and therefore on Spain, since we expect the risk premium to fall, making it cheaper for us to place our debt. The stock market will also react well to this news, with investors returning in force to Spanish companies now that the uncertainty about which path our country would take has gone.
This also removes the fear of a possible corralito (a freeze on bank withdrawals), since Spaniards would now trust that their savings are safe in the banks (which would supposedly have been cleaned up).
That said, we should be ready for possible new tax rises, some privatisations and, as we said, new cuts.
8 June 2012
In just a few weeks, the rumour that Spain would have to ask Europe for a bailout has gone from almost impossible to very likely. There are already plenty of international media outlets taking the rescue of the Spanish banks for granted and saying that this Saturday Spain will reach an agreement with Europe to request the capital needed to recapitalise its banks.
See also: How economic cycles work, by Ray Dalio
Sooner or later Spain had to make a decision: either ask for outside help or consider leaving the eurozone. For my part, I’d be more in favour of leaving the eurozone, for a number of economic reasons I won’t go into in detail, although Jonathan Tepper explained them perfectly. Over these past weeks the prime minister has been buttering us up, hinting that a bailout for Spain wouldn’t mean chaos, since Ireland got out of its crisis and Portugal is living peacefully with its bailout.
In a way he’s right: a bailout would be a breath of fresh air for the country and the markets, which have spent the whole week getting used to the idea of an intervention in the Spanish banks; as we’ve seen, it’s been the week with the biggest stock market gains of the year. Now, though, what will the consequences of the bailout be in the short, medium and long term?
We won’t get into technical terms. A bailout is simply a “loan” that we’re given and have to pay back. As Ignacio Escolar said, you could perfectly well use the euphemism of calling it European investment in Spain. Of course, that loan comes with conditions Spain has to accept, turning Spain (pardon the expression) into Germany’s “bitch”. What will those conditions be?
We don’t know for certain what conditions Spain will be asked to meet if it accepts the bailout, but we can get an idea: raising the retirement age, lowering pensions, cutting unemployment benefits and, in short, more cuts. It’s true that it won’t be chaos, at least for those at the top, since the new burden would once again fall on families, whose finances have already taken a considerable beating. Will the Spanish economy recover thanks to the bailout?
In the short term I’m sure it won’t, although there would be a period in which we’d regain confidence: once our financial system has been rescued, there would be no more bad news left for Spain and, supposedly, it could only go one way, which is up.
Of course, Spain has one figure that could make the bailout and its conditions useless. That figure is 23%. With 23% unemployment, if we take the scissors to spending again and the government doesn’t apply the right economic policies, the bailout will be of little use.
If the money received to recapitalise the banks isn’t used to turn the credit tap back on, we’d have a healthy financial system but a population on the poverty line and a shrinking economy.
For those who link the bailout with a corralito: there’s simply no need to worry about a possible freeze on withdrawals. Quite the opposite.
In short: what we were told wouldn’t happen is going to happen, though in one sense it isn’t bad news but something to be expected and possibly a breath of fresh air. Once the banks have been rescued, Spain’s economy will be in the hands of a single manager, Mariano Rajoy, and from that point on we’ll be able to start measuring his worth, for better or worse.
Featured image: GFreihalter, CC BY-SA 3.0, via Wikimedia Commons.
