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Spanish banking bailout and its implications for Portugal

By: BILL BLEVINS | [email protected]

Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK

After the Spanish government finally admitted that it needed help to prevent its banking sector collapsing, at an emergency discussion on June 9, Eurozone finance ministers agreed to lend Spain up to €100 billion to recapitalise its banks.  

The Eurogroup statement explained that the €100 billion total would be to cover estimated requirements and provide an additional safety margin.

The situation is fast moving, and there are growing concerns that the Spanish government may also need a bailout, but here’s a summary of the key facts of the bank rescue.

Is the bailout the same as Portugal, Greece and Ireland’s?

The €100 billion loan to Spain is not to bailout the government as such, but rather to recapitalise its banking system which was left with huge amounts of “toxic” loans when the property market crashed.  

Before the 2008 financial crisis, the government had relatively little debt. In Portugal, the bailout was based on public finances, structural reforms and recapitalising banks; in Spain it only covers the financial sector.  

Banks cannot afford to raise money to recapitalise to meet international requirements. The Spanish government cannot either because its borrowing costs have soared. Borrowing from the EU’s rescue funds means they can borrow at much lower rates.    

How do the terms compare to Portugal’s?

The “bailout lite” will apply conditions to the banking sector rather than the whole economy. There were reports that Spain would pay a lower interest rate than Portugal, but we do not yet know the final terms as they will depend on market conditions at the time.

Diário Económico and Jornal de Negócios have since reported that the European Commission denied that Spain’s “bailout” has better conditions and that support for Spanish banks will follow the Portuguese model.

Prime Minister Pedro Passos Coelho said on June 10 that he did not have plans to renegotiate Portugal’s bailout, but would keep a close eye on developments.  If there are exceptional circumstances, they should be shared with other countries, he added.

The Irish Independent has reported that the EU had denied that it was considering easing the bailout terms for Ireland.

Where will the money come from?

The money will be provided by one of the Eurozone’s bail out funds, the European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM).

The EFSF is the current temporary fund. It is due to be replaced in July by the permanent ESM. Loans from the ESM are senior to other creditors and must be repaid first.  

Either way, it is ultimately paid by taxpayers across the Eurozone. The EFSF has a “stepping out” facility whereby if Member States are receiving financial support they do not need to contribute, so Portugal would not contribute funds for Spanish banks if the EFSF is used. However, the ESM has no such clause, so every Member would have to contribute.  

The International Monetary Fund’s (IMF) rules prevent it from participating in a rescue solely focused on the banking sector. It will still play an advisory role though.

Will there be supervision?

The Spanish Prime Minister initially claimed the rescue deal would not be subject to the same level of supervision as Portugal, Greece and Ireland. However, EU and German officials have since said that it will be monitored by the European Commission, European Central Bank and the IMF – the “troika” – the same as the other bailouts.  

Is €100 billion enough?

The €100 billion offered was much more than expected. EU finance ministers wanted to take pre-emptive action and send a clear signal to the markets and public that they are ready to take “determined action”.

An IMF review into the Spanish banking sector, released just before the bailout request, looked at how Spanish banks would cope with a stressed economic situation and calculated they would need a €37bn injection. The €100 billion now being provided by the EU is much higher than this.  

The Spanish government and regulators have so far underestimated the problems facing the sector. Only time will tell if €100 billion is enough – some commentators believe much more will be needed.

What about Portuguese banks?

There are already recapitalisation plans for Portugal’s three largest banks. On June 4 the finance ministry announced they will receive a €6.6 billion injection, with most of the funds coming from the bailout package.

Portuguese bankers are reportedly satisfied with Spain’s decision to use European funds. The head economist at the BPI bank said there are no significant risks of financial contagion despite Portugal’s strong economic reliance on Spain, since “Spanish banks operating in Portugal are quite solid”.

Could the EU now issue Euro bonds?

This is a controversial issue. There have been calls for months for the Eurozone to consider issuing Euro bonds, which are jointly underwritten by all Eurozone States.  Some analysts and senior EU officials believe they could help resolve the debt crisis.

However, Germany would effectively have to underwrite weaker States and has so far rejected all proposals for a Euro bond.  

Does this mean bank savings in Spain and Portugal are now safe?

They are safer than they were. However, all this has reminded us that cash savings are not an entirely risk free investment, and not only in Spain and Portugal.  

If you have savings amounting to more than the national guarantee scheme, perhaps even if you have less, you may want to take advice from a professional wealth management firm like Blevins Franks on more secure options for your money as well as how to avoid higher taxation.  

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