By Imogen Reed
With elections being held over this weekend to determine the future of Greece’s position in the Eurozone and plans afoot to give Spain a boost to the tune of £100bn euros ($125bn), it is clear that Europe’s economic problems are far from over.
Whilst the exact figure needed to help out Spain is still unclear, the country remains adamant the money should not be described as a bailout. However, with a massive cash injection needed to save its banks from collapse how could it not be described as such?
Not all bad apples
On the positive side not all banks in Spain are affected and even the IMF has said that a considerable portion of its banking sector is well run. This includes the likes of Santander and BBVA. However, despite a rationalization amongst the Spanish banks with smaller ones being merged or subsumed by others, there is no doubt the Spanish economy is struggling with this its second recession in recent times.
It remains to be seen whether or not any bailout cash would make that much difference as the country is still hampered by high unemployment and significant problems with the property market. Even if the banks recover their position it is doubtful that there would be enough affluence in the population to sustain any recovery.
With unemployment in excess of 50% amongst under 25’s, meaning disposable income is limited. Those that previously had money to invest have already taken out consolidation loans to keep afloat in the now weak property market, which is now down 20% on peak values.
Poor debt to GDP ratio
The other problem that Spain faces is that it already has a poor debt to GDP ratio and this cash boost could see that rise from 70% to 100%. This could make the borrowing an extremely expensive exercise especially if there are doubts over the deal. This comes off the back of news that global credit rating agency Moody’s has cut Spain’s rating from A3 to Baa3 with the added warning that this could be cut further within 3 months.
Where Spain is viewed differently to others in Europe that have needed a bailout such as Portugal, Ireland and Greece is that it is generally regarded as having acted responsibly, firstly through its banking rationalization and secondly for introducing austerity measures. The most recent measures are reported to be worth around 27bn euros and are the most severe for 30 years.
How bail out works
The bail out money itself comes from funds set aside by 17 eurozone members to help fellow members overcome financial woes. The European Financial Stability Facility (EFSF) will run in parallel to the European Stability Mechanism from July, with the former expiring in 2013.
The members of the current EFSF raise money on open markets and it is viewed as a reliable source of borrowing. When replaced by the European Stability Mechanism it will boast a lending facility of 500bn euros.
Little confidence in bail out
Despite all this there are still question marks over these plans’ ability to restore confidence in failing European economies. Many argue that the measures simply aren’t enough to boost the economy to the level that it needs to be at.
The measures are seen as a quick fix and a sticking plaster over deep rooted financial crises and some experts say that a bail out of banks is just the start of a downward spiral for any country.
Whilst things in Spain continue to be debated and the finer details of monies needed ironed out the country is not the only one in trouble. Italy which has large debts coupled with a struggling economy could easily become next on the list to be bailed out.
Add to this the fact that Moody’s also cut Cyprus’ credit rating this week by two notches – Ba1 to Ba3. Cyprus is at risk due to the issues with the Greek situation and they have already had a bailout from Russia at the end of 2011 for 2.5bn euros. It remains to be seen whether Cyprus could re-approach Russia for a further bail out or if they will try and access some of the eurozone pot.
Whatever happens there are still tough times ahead in Europe and there are few signs of recovery that will show any kind of longevity.