Dutch paper Het Financieele Dagblad (via CNBC) has reported that the International Monetary Fund and European Union are in negotiations with Spain over a bailout that could be as large as 300 billion euros. The bailout negotiations should not surprise anyone. The size of the package, however, is higher than most experts imagined. Most projections for how much money the EU and IMF would have to aid the weakest Europe economies do not contemplate a single rescue deal that could diminish those funds by a third. Should the situation in Spain be so dire, it begs the question of how badly off some other of the region’s nations really are financially.
Spain’s government may deny that conversations are more than preliminary because news of late-stage negotiations would cause panic among holders of paper in its banks and also many owners of its own sovereign debt. The problem means that Spain will have to balance limited disclosure against a full admission that its financial trouble is worse than it has said and what many people supposed.
Spain’s other trouble is that Prime Minister Mariano Rajoy has taken a hard line on not allowing outside forces to determine what austerity measures his country needs to take. That resistance will be blown away if a huge rescue occurs, and the illusion of independence will disappear.
Spain has the same problem that some of its neighbors do. The European Central Bank will not bring down borrowing costs for the country if it does not knuckle under to EU-driven budget cuts and close monitoring of compliance. That gives those who would control the bailout even more leverage. At top of that list of nations that would render aid is Germany, of course. Like in Greece, the Spanish population and politicians would have to agree grudgingly to Germany’s ability to almost control the means by which Spain governs itself, at least financially.
No one should be shocked that Spain needs aid, not when its unemployment rate is at 25% and its real estate markets continue to crumble. But a bailout that amounts to nearly $400 billion for country with a gross domestic product of $1.4 trillion is unusual by any measure, as well as a sign the financial trouble of Europe may be worse than most analysts believe.
Douglas A. McIntyre