Spanish pride had to give way
- 10 June 2012
- From the section Europe
Ten days ago the Spanish Prime Minister Mariano Rajoy was clear: "There will be no rescue of the Spanish banks." On Saturday, it happened and the prime minister was nowhere to be seen.
Today he spoke to the press and said that if he hadn't agreed to a rescue of the banks, Spain itself would have been heading for a bailout. Then he announced he was heading to Poland to watch Spain play football.
The pattern has been seen before. It had been that way with Ireland. Denial followed by capitulation. Both countries had reserves to buy them time. Both were muscled into submission.
In the case of Ireland it was the European Central Bank. In the case of Spain it was Germany and Brussels. Early action was seen as the best way to prevent the debt crisis spreading and deepening.
With Spain there were a number of concerns. On the near horizon is the unpredictability of the Greek elections. There were fears that a Greek crisis could damage Spain further, forcing up its borrowing costs to the point that Spain itself needed a rescue.
Whether it be the EFSF or the ESM - the two main bailout mechanisms deployed to help eurozone countries - there are probably not the funds to bail out Spain. Furthermore the Italian prime minister believes that Italy is being undermined by the crisis with the Spanish banks.
Apart from tactical concerns the basic fact was that Spain could not cover the bad loans in some of its banks. So Madrid was persuaded it had to put up its hand and request help and do it immediately.
National pride played its role as it has done elsewhere. Spain insists it has not asked for a bailout. That may be true in the most narrow sense.
The truth is that the EU's fourth largest economy has had to turn to the eurozone's main bailout fund for help. Spain could no longer be certain of being able to finance its own needs.
Pride, as it so often does, focuses on the role of the International Monetary Fund (IMF). Only recently a Spanish minister had declared "the men in black will not be coming to Madrid".
A significant part of Saturday's two-and-a-half-hour conference-call was related to the influence of the IMF. It will not be loaning money to Spain, but it will have a role monitoring the implementation of this rescue.
The Spanish government prefers to describe the IMF role as "advisory".
The extent of the over-sight and the conditions attached to this deal have not fully emerged. Madrid says that it will be supervision-lite. There will be no new austerity measures for the country as a whole.
There will be none of the harsh conditions that attached to previous bailouts. Spain is in the midst of recession. The IMF believes the Spanish economy will contract by 4.1% this year and 1.6% in 2013. Unemployment is predicted to reach 26%.
Spain will also not be required to embark on new structural reforms. It already has a programme in place which has drawn the respect of Angela Merkel among others. There will have to be significant changes to the banking sector however.
What so far has not been promised is a thorough investigation of Spain's banks. Stories are emerging of greed and cronyism with banking boards staffed by those with political connections.
Yesterday the Guardian reported that one bank board included a supermarket check-out worker.
In the end Spain was not brought to this point by the collapse of Lehman brothers in 2008. It has ended up needing a bank rescue because of systemic corruption and the collapse of a property bubble.
The bailout has been welcomed in Berlin and Washington. The head of the IMF Christine Lagarde said "it gives assurance that the financing needs of Spain's banking system will be fully met".
The President of the European Commission, Jose Manuel Barroso, said that through bank restructuring and other reforms, Spain could return to growth.
It buys time. The can, as US President Barack Obama likes to say, has been kicked further down the road.
What it does not address is the lack of growth and the growing divide between many of the southern European countries and Germany.
The eurozone remains fundamentally unstable because such different economies are yoked together in a monetary union.
Gradually it is edging towards a fiscal union and Angela Merkel has become a latter-day evangelist for political union.
In a turbulent time it is a project in the making.