MINISTER FOR FINANCE Michael Noonan has welcomed Spain’s announcement that it will formally request financial aid from Europe in the coming days.
Calling it a “significant” development, Noonan said the move will have particular importance for Ireland’s economy “as the eurozone crisis has weighed on our economic growth over the past year”.
He added that Madrid’s request for a bailout for its ailing banking system will provide “much needed confidence and stability in the eurozone”.
Following a two-and-a-half hour telephone conference with the 16 other eurozone finance ministers and chief of the International Monetary Fund Christine Lagarde, Noonan confirmed that European authorities would provide up to €100 billion in loans to fully recapitalise the Spanish banks.
Included in the money will be a “significant safety margin beyond the recapitalisation requirements”.
The funds will be provided through either the EFSF or the ESM at the same interest rates which apply to other programme countries, including Ireland, Portugal and Greece.
As 100 per cent of the loans will be directed into the banking system, the conditions of the Memorandum of Understanding will be limited to the financial sector. That is, no programme of austerity will be required from the State. However, the funds will still be the responsibility of the Spanish sovereign, and not the banks themselves.
The eurogroup noted:
The Eurogroup considers that the Fund for Orderly Bank Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.
None of the loans will be provided by the IMF but it will continue to support the implementation and monitoring of the financial assistance.
Why is there no austerity programme?
The lack of an austerity package attached to a bailout agreement will raise some eyebrows among other programme countries. The main difference between Ireland and Spain’s bailouts is that the Irish government received loans for the sovereign – not just the country’s banks. That means that Spain’s government will continue to go to the markets for funding.
As the group of eurozone finance ministers noted, all of the money requested by Spain will be redirected into its banks as capital injections. Therefore, the conditions applied to the money will be limited to the sector it is used for. The group said it was already satisfied with some of the fiscal and labour market reforms implemented to strengthen the capital base of the Spanish banks.
Progress in these areas will continue to be reviewed regularly “in parallel with the financial assistance”.
Beyond the determined implementation of these commitments, the eurogroup considers that the policy conditionality of the financial assistance should be focused on specific reforms targeting the financial sector, including restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector.
Will Ireland have to contribute?
At the moment, the details of the bailout are not clear. Spain is waiting for reports to be delivered by international auditors and external evaluators as to exactly how much it will need to request. Those figures are not expected for about another week.
The eurogroup has also not identified where the loans will be provided from – the EFSF or the ESM. This point will be particularly crucial for Ireland.
Because of its status as a programme country, Ireland is not required to contribute to the EFSF. However, if a decision is taken to provide the funds through the ESM, Ireland could be liable to provide its 1.59 per cent.
If the full €100 billion is required and it is being provided only through the ESM, then Ireland may have to find €1.59 billion very shortly. No clarification on this could be given by the Department of Finance as no direction has been received from the eurogroup. Regardless of the Spanish bailout, Ireland was due to pay €1.274 billion into the fund in five quarterly installments of €254 million by the end of 2013.
Can we look for guarantees?
The Finnish government are leading the way on this one. Finance Minister Jutta Urpilainen has said that Helsinki may demand guarantees in exchange for aid if the funds are taken from the EFSF. However, if they are taken from the permanent ESM fund, then no guarantees will be required “as it would carry less risks for Finnish taxpayers”.
The US and IMF have both welcomed the eurogroup’s decision to grant “credible” financial aid to Spain.
-Additional reporting by Gavan Reilly, AFP (© AFP, 2012)
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