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Eurozone crisis explained Eurozone crisis explained
(17 days later)
Spain has become the fourth member of the eurozone to have to seek outside assistance to help it deal with a debt crisis.Spain has become the fourth member of the eurozone to have to seek outside assistance to help it deal with a debt crisis.
Spain's main problem is its banks, and as such, the up to 100bn euros ($125bn; £80bn) it will receive will be targeted at its financial sector.Spain's main problem is its banks, and as such, the up to 100bn euros ($125bn; £80bn) it will receive will be targeted at its financial sector.
What went wrong with Spain?What went wrong with Spain?
Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.
Greece, Portugal and Italy all had way too much debt.Greece, Portugal and Italy all had way too much debt.
But the Spanish government's borrowing was under control - that is, it ran a balanced budget on average - every year until the eve of the 2008 financial crisis.But the Spanish government's borrowing was under control - that is, it ran a balanced budget on average - every year until the eve of the 2008 financial crisis.
And as Spain's economy grew rapidly before 2008, its debt-to-GDP ratio was falling. Germany's, by contrast, continued to rise.And as Spain's economy grew rapidly before 2008, its debt-to-GDP ratio was falling. Germany's, by contrast, continued to rise.
When Spain joined the euro the Spanish government resisted the lure of cheap loans, but most ordinary Spaniards and its banks did not.When Spain joined the euro the Spanish government resisted the lure of cheap loans, but most ordinary Spaniards and its banks did not.
The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages.The country experienced a long boom, underpinned by a housing bubble, as Spanish households took on bigger and bigger mortgages.
House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to ministry of housing data. Since the bubble burst, they have fallen by 25%.House prices rose 44% from 2004 to 2008, at the tail end of a housing boom, according to ministry of housing data. Since the bubble burst, they have fallen by 25%.
The economy, which grew 3.7% per year on average from 1999 to 2007, has shrunk at an annual rate of 1% since then.The economy, which grew 3.7% per year on average from 1999 to 2007, has shrunk at an annual rate of 1% since then.
So, although the Spanish government still had relatively low debts, it is now having to borrow like crazy to deal with the effects of the property collapse, the recession and the worst unemployment rate in the eurozone.So, although the Spanish government still had relatively low debts, it is now having to borrow like crazy to deal with the effects of the property collapse, the recession and the worst unemployment rate in the eurozone.
What does this mean for banks?What does this mean for banks?
The banks had been thriving thanks to the rapid expansion of the property sector.The banks had been thriving thanks to the rapid expansion of the property sector.
But its collapse brought default from borrowers who were suddenly bust and a plunge in the value of the assets the loans were based on.But its collapse brought default from borrowers who were suddenly bust and a plunge in the value of the assets the loans were based on.
Since the onset of the recession, which some believe will continue for the rest of 2012 and into 2013, losses on loans have continued to mount as borrowers struggle to make repayments.Since the onset of the recession, which some believe will continue for the rest of 2012 and into 2013, losses on loans have continued to mount as borrowers struggle to make repayments.
The situation has been made worse by the fact that the banks borrowed the money on the international markets to lend to developers and homebuyers, a much riskier strategy than using the deposits they get from savers.The situation has been made worse by the fact that the banks borrowed the money on the international markets to lend to developers and homebuyers, a much riskier strategy than using the deposits they get from savers.
As market confidence has deteriorated, it has become harder, and more expensive, for them to fund their operations.As market confidence has deteriorated, it has become harder, and more expensive, for them to fund their operations.
They are sitting on massive losses whose size is not yet fully known - some say it could be as much as 180bn euros.They are sitting on massive losses whose size is not yet fully known - some say it could be as much as 180bn euros.
Not all of the banks are in this situation, however. The International Monetary Fund said a large part of the banking sector, including Santander and BBVA, is well run and resilient.Not all of the banks are in this situation, however. The International Monetary Fund said a large part of the banking sector, including Santander and BBVA, is well run and resilient.
What has been done to help troubled banks?What has been done to help troubled banks?
Spain has begun to restructure its banking sector.Spain has begun to restructure its banking sector.
Many of its smaller, weaker banks have had to merge or have been rescued by larger ones. The number of branches has been cut by 15%, and 11% of the jobs in the industry have gone.Many of its smaller, weaker banks have had to merge or have been rescued by larger ones. The number of branches has been cut by 15%, and 11% of the jobs in the industry have gone.
Up to the end of April, the government had injected 34bn euros into its banks, according to the IMF.Up to the end of April, the government had injected 34bn euros into its banks, according to the IMF.
That is not including the 19bn euros Bankia, Spain's fourth-largest bank, asked for last month, shortly before it was nationalised. That is not including the 19bn euros Bankia, Spain's fourth-largest bank, asked for shortly before it was nationalised.
Bankia itself was formed when several regional banks, or cajas, were brought together because they were too small to bear the knock from the economic downturn.Bankia itself was formed when several regional banks, or cajas, were brought together because they were too small to bear the knock from the economic downturn.
The IMF said the banking sector needed an injection of at least 40bn euros to stabilise its finances and protect it against future shocks. Independent audits commissioned by the Spanish government put that figure at up to 62bn euros.The IMF said the banking sector needed an injection of at least 40bn euros to stabilise its finances and protect it against future shocks. Independent audits commissioned by the Spanish government put that figure at up to 62bn euros.
To put these figures in context, Spain's budget this year - described as the most austere in 30 years - included tax rises and spending cuts worth 27bn euros.To put these figures in context, Spain's budget this year - described as the most austere in 30 years - included tax rises and spending cuts worth 27bn euros.
With the crisis of confidence in the markets about the state of the banking sector and its impact on government finances, it has become increasingly expensive for the government to borrow on the markets.With the crisis of confidence in the markets about the state of the banking sector and its impact on government finances, it has become increasingly expensive for the government to borrow on the markets.
Like credit card companies, investors demand higher interest the riskier a prospect they think you are. As a result, Spain has had to turn to emergency funding from its eurozone partners.Like credit card companies, investors demand higher interest the riskier a prospect they think you are. As a result, Spain has had to turn to emergency funding from its eurozone partners.
How will the bailout work? How will the bailout work?
Spain will be able to borrow up to 100bn euros. But it isn't a bailout or rescue, it insists.Spain will be able to borrow up to 100bn euros. But it isn't a bailout or rescue, it insists.
The help it gets will differ from the bailouts given to Greece, Portugal and Ireland in a number of ways.The help it gets will differ from the bailouts given to Greece, Portugal and Ireland in a number of ways.
The loans will come from eurozone funds set up to help members in financial distress: the European Financial Stability Facility and/or the European Stability Mechanism, which comes on stream in July. The loans will come from eurozone funds set up to help members in financial distress: the European Financial Stability Facility and/or the European Stability Mechanism, which is supposed to come on stream in July.
In previous cases, money has come from the troika of international authorities - the European Union and the International Monetary Fund as well as the eurozone.In previous cases, money has come from the troika of international authorities - the European Union and the International Monetary Fund as well as the eurozone.
Also, the money will be targeted specifically at Spain's banks, rather than at the economy as a whole through central government.Also, the money will be targeted specifically at Spain's banks, rather than at the economy as a whole through central government.
Spain was desperate to avoid this, as the sovereign bailouts have previously come with demands to cut spending and raise taxes and close supervision of the countries' finances.Spain was desperate to avoid this, as the sovereign bailouts have previously come with demands to cut spending and raise taxes and close supervision of the countries' finances.
The conditions this time will be focused on the finance sector, Spain says. But the government will sign the deal and will have to stand behind the loans. While the government will initially have to sign the deal, some eurozone countries want the bailout funds to be able to deal directly with banks without involving governments at all.
Olli Rehn, European commissioner for economic and monetary affairs, has said that in addition to the conditions for banks and the banking system, he also expects Spain to work on bringing down its public deficit and making sure that its indebted autonomous regions do the same. It is possible that could apply retrospectively to Spain.
Full details of the amount Spain is asking for and the conditions that will be attached should be published at a meeting of eurozone finance ministers on 9 July. Prime Minister Mariano Rajoy has unveiled another set of austerity measures, including another 65bn euros of spending cuts and a rise in VAT from 18% to 21%.
At the meeting of eurozone finance ministers on 9 July, it was agreed that Spain could borrow an initial 30bn euros to support its banks.
The final figure of how much of the 100bn euros offered that Spain will want to borrow may not be known until September.