The bailout of €100billion has been hailed as a major victory for the single currency despite some claims that the amount needed to save Spain’s struggling banks is just the tip of the iceberg.
The amount offered is 2.5 times more than the amount suggested by the IMF in its report last week raising concern that the true extent of the nation’s banking crisis is far worse than initially feared. The deal is also a massive U-turn for Prime Minister Marianjo Rajoy who up until Friday was denying that his government was seeking fiscal aid.
The rescue request finally came after weeks of escalating concern over the state of Spain’s banks with worries that their bad debts could overwhelm public finances. To Rajoy’s credit he was able to negotiate the bailout for the struggling banks without having to commit his nation to a full scale bailout. To do so would have seen the imposition of further austerity measures and seriously damage Spain’s reputation.
Rajoy said his reforms had spared Spain a full rescue for its public debt but some analysts say the bank aid may only be a prelude to an eventual bailout of the state.
The Spanish crisis, coinciding with the prospect of Greece exiting the euro after elections on June 17, roiled financial markets around the world, sending the euro to an almost two-year low on June 1 and raising Spanish borrowing costs to near euro- era records. All eyes will be fixed upon the government to see whether they can fix the banks and root out the corruption that has damaged Spain so thoroughly.
JPMorgan Chase & Co. Said; “We expect the government will take advantage of having the 100 billion Euros credit line to force a realistic cleanup of the banks, being conservative to avoid a full country bailout.”
Some observers were less confident;”The burden of recapitalising insolvent banks or loss-making acquisitions of solvent banks will fall on Spanish citizens,” said Karl Whelan, economist at University College, Dublin. “For this reason, this weekend’s announcement may well end up shutting Spain out of the sovereign bond market.”
As a result of the bailout markets around the world saw improvements. The Euro began to rise against a basket of currencies for the first time in weeks, however; the positive sentiment for the Euro may be short-lived with speculation of a rate cut for July.
With the pressure eased on Spain momentarily all eyes will now turn to the Greek elections on the 17th. The threat of a bank run from Greece to Spain may turn into a sprint if the leftist SYRIZA party wins. Its leader Alexis Tsipras has vowed to rip up the bailout agreement and demand a renegotiation.
If the EU and IMF refuse to go to the negotiating table then it is likely that both bodies would stop aid payments leaving Greece to default by September and plunging the country into chaos.
If this happens then it is all but certain that the Greeks will chose to leave the Euro, and that is sure to have a devastating effect across the continent and Italy is the next danger zone.
The Pound to Euro exchange rate is currently trading at 1.233
The Pound to US Dollar exchange rate is currently trading at 1.554
The Euro to Australian Dollar exchange rate is currently trading at 1.264
The Euro to US Dollar exchange rate is currently trading at 1.260
The Euro to Pound exchange rate is currently trading at 0.810
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