On June 5, another casualty in the European debt crisis emerged, as Spain announced that it soon would be unable to borrow in the bond market without assistance from other European Union nations. Emilio Botin, the chairman of Banco Santander, said about 40 billion euros, or $50 billion, in European funds would be needed to repair Spain’s banking sector, according to Bloomberg News.
Spain’s announcement launched unofficial negotiations over a deal to rescue the nation’s banks. As the euro zone’s fourth-largest economy, Spain is considered too big to fail “and possibly too big to steamroll, changing the balance of power in negotiations over a bailout,” write Nicholas Kulish and Raphael Minder in the Times on June 6. By demanding emergency aid for its banks, Spain tried to avoid the austerity measures and deep recessions faced by smaller nations such as Greece, Portugal, and Ireland.
Spain’s demands are bolstered by the fact that it did not run large budget deficits before the crisis. The nation has a lower level of debt as a percentage of gross domestic product than even Germany, the European model of fiscal restraint. As “calls for growth have begun to outweigh German insistence on austerity,” write Kulish and Minder, Spain planned to make a convincing argument that European aid to its banks should not be accompanied by a loss of governmental decision-making power over the Spanish economy and fiscal policies. Spanish leaders are pushing for a deal that only requires the country to tighten its oversight over the financial sector without affecting its budget powers. Because Spain has already adopted difficult changes and spending cuts, European officials were expected to be much more receptive to a bailout free of the austerity measures imposed on Greece and other countries.
Madrid’s “trump card in this latest game of euro-zone poker” says Kulish and Minder, is that a Spanish default and exit from the euro zone could be catastrophic. German officials privately pressed the Spaniards to take a bailout, a stance that gives Spain bargaining power, write Kulish and Minder: “the chance that it self-destructs implicitly holds the rest of Europe hostage until they agree to terms.”
On June 21, the Spanish government had to pay punitively high interest rates to sell its bonds, and it released audit reports indicating that it would need 62 billion euros to support its banking system. The release of the audit is expected to launch the Spanish government’s official negotiations with European leaders over the terms of a multi-billion bank bailout.
Spain’s banking crisis underscores how the European Union has lurched from one crisis negotiation to the next. “The strategy of plugging holes only works for so long,” Friedrich Mostboeck, chief economist and head of research for the Erste Group in Vienna, told the Times. “Eventually, you come to the point where a common euro area requires a common fiscal policy.”
This lack of a unified, guiding fiscal policy has given Spain and other troubled countries negotiating power – possibly at the expense of the broader European economy. The situation illustrates the value of establishing ground rules and policies before a crisis hits to make sure that you are playing on a level, fair field.
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