LPL Financial‘s chief strategist Jeffrey Kleintop has a piece out about the $125 billion Spanish bailout and, more specifically, about how Spain was able to manhandle the bureaucrats in Brussels…
How was Spain able to score the win?
- The loan is only for the banks. One reason the deal is much more favorable to Spain than the rescue terms offered to other countries is that the loans to the Spanish government are being made only for use by Spanish banks, rather than for general government use. The deepening recession is resulting in loan losses for the banks. The loans will be channeled through Spain’s bank rescue fund.
- Spain elected leaders committed to fiscal discipline. In contrast to the elections in Greece, last November’s elections in Spain produced a clear win and mandate for fiscal discipline for the conservative People’s Party and Prime Minister Mariano Rajoy.
- Spain’s debt burden is more manageable. While the loan will add about 10 percentage points to Spain’s debt-to-GDP ratio, which was 68.5% last year, this remains well below the debt-to-GDP ratios (in excess of 100%) of Portugal, Ireland, and Greece. It is also below the ratios of Germany and France, considered the most fiscally stable countries of the Eurozone.
- Spain has already made progress on its budget deficit. While the recession makes Spain likely to miss the 6% budget deficit target for 2012, Spain has cut its budget deficit successfully in each of the past two years. The deficit went from 11.2% of GDP in 2009 to 9.2% in 2010 and 8.5% in 2011. Spain has a goal of a 3% deficit by 2014 and enacted a constitutional mandate to have a balanced budget by 2020.
Though Spain will likely request the full 100 billion euros offered, the exact amount announced this week will depend on audits of the condition of Spanish banks, which are in progress. Securing the rescue a week before elections in Greece that risk prompting that country’s exit from the euro and further movement of deposits out of southern European banks is of particular importance at building a firewall against contagion in the European banking system.