Spain has become the fourth European country to request a huge financial bailout from international lenders.
On Saturday, Spain agreed to accept up to $125 billion to prop up its teetering banks. The banks helped fuel a housing boom that’s still unraveling.
Spain insists it isn’t being bailed out, like Greece, though. Prime Minister Mariano Rajoy was adamant in a press conference Sunday that his nation was taking a loan.
“It’s a line of credit from Europe,” he said. “With the objective of re-establishing the solvency of any banks that need it.”
That would be at least a third of Spain’s banks, according to the government.
“With this deal the credibility of the European project won out,” Rajoy said. “The future of the Euro won, as well as the solidarity of our financial system.”
But best of all, he said, the money comes with virtually no strings attached, unlike loans to save Greece, Portugal and Ireland in recent years. In those countries the International Monetary Fund, Europe’s Central Bank and the European Union – known as the Troika – directly intervened as part of the rescue. Not so fast.
Monday, European officials contradicted Rajoy’s boast. The Troika will, in fact, keep close tabs on how Spain spends the money. All of this has left ordinary Spaniards feeling confused and angry.
Spain’s current crisis has complex origins, but banks play a big role. During a decade-long construction boom they lent money wildly, sometimes for projects that seemed to make no sense, such as airports in the middle of nowhere.
Monday morning outside the Barcelona office of one bank set to be rescued, a 75-year-old retiree Angel Gil said he was furious that no one stopped them.
“Our banks lied to us for 10 years,” he said. “And I mean they really lied, about the state of their finances. And the former government didn’t check into it. Somebody should have raised the alarm.”
Gil said if the banks couldn’t be trusted to make wise investments before, he doesn’t trust them to pay back any European rescue loans.
“We, the Spanish people, are going to end up footing the bill,” he said. “Because ultimately the Spanish government is responsible for the loan if the banks can’t handle it.”
By Monday afternoon, market analysts were echoing Gil’s sentiments and Spain’s borrowing costs spiked again. As one analyst put it, the weekend bank rescue may have fixed an acute problem, but the chronic problems persist.
While Rajoy was trumpeting his deal in Brussels, he said he understood what those chronic problems are.
“This year is going to be bad,” he said. “Our economy is forecast to shrink by 1.7 percent. Unemployment is going to go up. There’s no sense denying it.”
Unemployment is already at 25 percent in Spain. As it rises, more families will likely default on their mortgages, which is fueling even more anger because in Spain you can’t just hand in the keys to your house to your bank. The debt doesn’t disappear — in fact your kids can "inherit" it.
Last week in Madrid about 30 families, who have defaulted, stormed a branch of a bank called Bankia, the poster child of bad real estate investments.
One of the protesters, a woman who did not wish to be named, said, the bankers should be tried and jailed, adding that she thinks Spain needs a bailout for the people.
“What Spain most needs is to get its economy growing again, and fast,” said Kathleen Brooks, director of research at the currency trading service, Forex.
She said if government coffers continue to dwindle, no loan or bailout or deal will be big enough.
“It was very much a bailout for the banks, not for the unemployed,” she said. "And that essentially makes the government situation worse because as the unemployment remains so high, they’ve got to use a greater portion of public finances to pay unemployment benefits and welfare payments.”
Brooks said the banks may be sorted out for the moment, but the big social problems will likely weigh on public finances further.