News of an agreement on a Spanish bailout over the weekend came as no surprise. But with the terms under wraps for now, we can only speculate on whether or not Spain was successful in its bid to achieve a better deal than Portugal, Ireland, or Greece.
What we do know is that Spain was forced to agree to take on the liability of the debt. If the full €100 million is given to Spain, it will push the country’s debt-to GDP ratio to about 90 per cent. This would be a 10 per cent increase on its current debt-to GDP ratio. With debt levels so high, bond yields will continue to rise further as investors’ perception of risk grows.
Without revealing too many details, Germany made its position clear on the rescue package, with finance minister Wolfgang Schuble reaffirming that Spain will carry the liability of its debt.
While investors were initially encouraged by the bailout agreement, confidence quickly waned as questions arose of the exact details of the deal.
In fact, investors will barely have time to digest the news of a Spanish rescue package before the focus turns to Greece once again. The outcome of the crucial Greek elections holds the fate not only of the country, but also the eurozone.
It’s not surprising therefore, that Europe had been pushing for an agreement to the Spanish problem before the Greek elections take centre stage.
For Ireland, the news that Spain may have succeeded in securing a rescue package that has less stringent conditions than those imposed on other bailout countries initially buoyed hopes of a renegotiation of the terms of its own bailout.
But there are major differences between the two bailouts that can’t be ignored. This throws a spanner in the works for Ireland’s argument.
Unlike Ireland, Spain will receive no funding from the International Monetary Fund. Though EU officials have confirmed that a "troika” of the IMF, the European Commission, and the European Central Bank will supervise the program, there has been no confirmation that the country will face the targets that other bailout countries are forced to adhere to.
Another crucial difference between the Spanish and Irish rescue packages is that the Spanish bailout was granted solely to restructure the country’s banks. Spain can still go to the markets to gain funding.
In contrast, when Ireland received its bailout, the country used the funds not only to bail out its banks, but also to shore up government finances. Ireland has not had access to bond markets since 2010.
In the run up to the Irish referendum on the fiscal compact earlier this month, the Irish government pleaded with voters to approve the treaty, saying that Brussels and Germany would look favourably on the country if it went ahead, and hinted that renegotiation of the harsh measures attached to its bailout would be more likely if the treaty was approved.
Following the results of the referendum, Irish Prime Minister Kenny spoke to German chancellor Angela Merkel and was told in no uncertain terms that the bailout deal was not up for negotiation.
Not exactly what the government was hoping for. Nor the public.
Spain’s feat in securing a bailout while the country still has access to the market shows just how much is at stake for the eurozone. If Spain loses access to the markets, the effect could be catastrophic. The EU would simply not have enough funding available to rescue Spain if its economy went into freefall.
Yet fiercely proud Spanish Prime Minister Mariano Rajoy refuses to acknowledge the severity of the problem and has avoided even calling it a bailout. Just a helping hand from big brother perhaps.
Whatever Mr Rajoy wants to call it, it’s still bad news for Ireland. The Irish government was pinning its hopes on Spain receiving a rescue package that either had the same or better terms. If Spain had received a bailout with similar terms, both countries could have formed an alliance to lobby Brussels and Germany together.
On the other hand, if Spain was granted emergency funding with better terms, Ireland could have pleaded its case to Brussels and Germany in the interest of ‘fairness’.
What has come about instead, is a limited mini-bailout of €100 billion for the fourth largest economy in Europe that will (hopefully) allow it to shore up its flailing banking sector.
Unfortunately for the Irish, the rescue packages are varied enough for Ireland’s pleas to fall on deaf ears. For now at least, the Irish government will have to go back to the drawing board.