Europe seals Spain bailout

Spain got what it wanted after signing a memorandum of understanding with its eurozone partners early Tuesday, but also some of what it didn’t.

The 17-member eurozone agreed to extend by a year Spain's deadline to meet its deficit target and to transfer some 30 billion euros of a 100 billion euro credit line to rescue ailing banks.   

It also raised Spain’s 2012 deficit target to 6.3 percent of its gross domestic product, up from 5.3 percent, imposed in March. The move reflects Spain’s inability to meet previous commitments. The target for 2013 is 4.5 percent, which effectively delays meeting the EU-wide mandated ceiling of 3 percent until 2014. 

The terms will not be fully spelled out until July 20, when the final deal will be signed, at an interest rate of less than 4 percent. Spain’s cost of borrowing dropped when the news came out.

Soft bailout

Policymakers and analysts alike are describing it as a “soft bailout” because the conditions will not be as draconian as those of Greece, Portugal, and Ireland.

Still, Spain and its financial sector will be under permanent European supervision in yet another blow to an already humbled country. While markets timidly welcomed the news, the deal doesn’t address the root causes of the European crisis, and only buys more time.

Spain, which is the eurozone's fourth-biggest economy, also secured European support to transfer the multibillion-euro loan from the government to banks sometime next year, once the European bank union is in place. This relieves pressure from the country's sovereign debt rating, which was faced with unsustainable debt levels before the intervention. 

The European Commission (EC), the European Central Bank, and the International Monetary Fund will supervise the Spanish government’s and rescued banks’ compliance with the terms of the loan every three months.

Economy minister Luis de Guindos on Tuesday said Europe would transfer up to 100 billion euros in the next 18 months, although he declined to say how much Spain would ultimately need.

Grueling recession

Mr. de Guindos also suggested that the commission impose a sales tax increase, as well as pension reforms, more working hours, and further wage cuts for public employees, on top of other restrictions. Experts fear these conditions will inevitably lengthen an already grueling recession, slowing the economy by more than 2 percent in 2012. More contraction is expected for 2013, on top of an unemployment rate of 25 percent.

The new measures will hurt Spain’s crippled economy by further undermining plummeting consumer spending. Banks will be required to increase their security cushion, known as tier capital, to 9 percent, far above what is required in other countries.

The Organization for Economic Cooperation and Development issued a stern warning on Tuesday that unemployment is becoming structural, rather than cyclical.