Spain goes from denial to bailout

Following a series of denials about the need for financial assistance, the Spanish banking system is due to receive up to 100bn euros in loans.

The favourable loans being made to the Fund for Orderly Bank Restructuring (Frob) should enable Spanish banks to extend credit to individuals and businesses in the struggling Spanish economy.

Whilst not an economic bailout like those received by Greece, Portugal and Ireland, this latest eurozone rescue package is of a similar scale.

It looks to be around half the size of the money extended to Greece and more than that lent to either Portugal or Ireland.

The money is being paid in the first instance to the Spanish government, who will distribute it via the bank restructuring scheme. The terms of these loans are still to be agreed, with many of the details depending on the findings of two audits of the Spanish banks.

Money is coming from the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). It will be considered as Spanish state debt, helping the banking sector but placing the Spanish government under greater financial pressure in the long-term.

Once again, this looks like a deferment of the eurozone sovereign debt crisis, rather than any sort of solution.

It will be interesting to see how the markets react when they open on Monday morning.

Following a reasonably good week for stock market investors in Europe, there is a reasonable chance that this will be seen as bad news; although often bad news doesn’t correlate with falling markets.

The next big event in Europe is only a week away, with the Greek re-elections on Sunday 17th June. If investors are able to shrug off concerns about the troubles in Spain this week, they are less likely to be able to ignore the failure to decisively elect a government with a strong mandate for austerity in Greece.

Photo credit: Flickr/NASA