Europe

Spain's Rajoy hails bank rescue as 'victory for euro'

  • 10 June 2012
  • From the section Europe
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Spanish Prime Minister Mariano Rajoy has hailed a decision by eurozone finance ministers to help Spain shore up its struggling banks as a victory for the European common currency.

"It was the credibility of the euro that won," he told reporters.

On Saturday, the eurozone ministers agreed to lend Madrid up to 100bn euros ($125bn; £80bn) to help banks hit by bad property loans.

The US and the International Monetary Fund (IMF) also welcomed the move.

Mr Rajoy told a news conference in Madrid that efforts by his centre-right government to restore Spain's public had avoided a wider state bailout.

"If we had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain," he said.

The rescue, Mr Rajoy added, would speed up the "flow of credit loans to families, to small and medium enterprises, to self-employed workers".

But he warned that the near future looked bleak: "This year is going to be a bad one." He said that the economy, which is in its second recession in three years, was still expected to shrink by 1.7%.

The rescue fund amounts to about 2,100 euros per person in Spain.

Auditing banks

The planned eurozone loans at preferential rates are aimed at bolstering Spain's weakest banks, left with billions of euros worth of bad loans following the collapse of a property boom in recent years and the recession that followed.

The exact amount that Spain will receive will be decided after the completion of two audits of its banks, which Spain's economy minister Luis de Guindos said would be ready within a few days.

The money will come from two funds - the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), which comes into force next month and will be formally requested at the next eurozone finance ministers' meeting.

Investors have recently demanded higher and higher returns to lend to Spain, making it too expensive for the country to borrow the money needed for a bank rescue from the markets.

The European Union's economic affairs commissioner, Olli Rehn, said the deal should help calm investors' nerves: "This is a very clear signal to the markets, to the public, that the euro area is ready to take decisive action in order to calm down market turbulence and contain contagion."

A statement from the European Commission said it would put Spain on course for economic recovery: "We are certain that Spain can gradually regain the confidence of investors and market participants and create the conditions for a return to sustainable growth and job creation."

Measures

Lloyds Banking Group economist Charles Diebel said in a report that the move was "bailout lite" and questioned whether the money would stop the rot: "Will it be enough? That's questionable as it is still prevention rather than cure and again only keeps the banking sector alive rather than really supporting growth."

However the bailout plan was praised by UK Foreign Secretary William Hague.

"We've been asking for the eurozone to take decisive measures to stabilise itself in terms of the European Central Bank supporting the banking system and eurozone countries being prepared to work together in a closer way and integrate themselves more closely fiscally and, for instance, by having eurobonds," he told Sky News.

On Saturday, IMF managing director Christine Lagarde said the plan for Spain should provide "assurance that the financing needs of Spain's banking system will be fully met".

US Treasury Secretary Timothy Geithner said it was "important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area".