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Europe bailout of Spain could cost $125B
U.S Treasury secretary Timothy Geithner welcomed Spain’s decision and the offer of European support, describing them as “important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area.”
French Finance Minister Pierre Moscovici said the deal would “contribute to restoring confidence in the eurozone.”
“The accord announced tonight speaks to a reinforced solidary among the countries of the eurozone and to their resolute desire to ensure its stability,” he said in a statement.
Some of Spain’s banks are struggling with by toxic real estate loans and assets. The Bank of Spain says they total around €180 billion. Nationalized lender Bankia, SA, which has requested €19 billion in aid, has €32 billion in toxic assets. Around four other banks are considered prime candidates for bailouts. De Guindos said Saturday the sector is largely solid and the euro zone package will be funnel toward only about 30 percent of it.
“This uncertainty, and hence the panic, will slowly dissipate from the markets,” he said. Pampillon added that with polls forecasting a pro-Euro victory in Greek elections, markets would be further relieved because the austerity conditions imposed on Greece would most likely be fulfilled.
Moody’s said Spain’s banking problem is largely confined to that country and not likely to spill over to other eurozone nations, with the exception of Italy — where the European Central Bank has already stepped in to buy government bonds as a way to help lower the country’s borrowing costs.
Spain has been criticized for being too slow to set out a roadmap to resolve its problem. European business leaders and analysts have stressed that Spain must find a solution quickly so that it is not caught up in any market turmoil sparked by the Greek elections on June 17. There are concerns that anti-bailout left-wing party Syriza could become the largest party in the Greek parliament, putting the country’s membership in the eurozone at risk.
But others said it’s more important for Spain to correctly assess how to shore up its banking system than it is to hurry into a bailout ahead of the Greek elections.
If Spain doesn’t get a request for outside help right the first time, “then you are in second bailout territory,” said Mark Miller, an analyst with Capital Economics in London.
Working in Spain’s favor is the fact that its public debt is actually quite low, at 68.5 percent of its gross domestic product at the end of 2011.
Its debt is predicted to hit 78 percent by the end of the year, but even that figure would be below the debt-to-GDP ratios of Europe’s strongest economy, Germany, which is at 82 percent.
But Spain’s in its second recession in three years, with unemployment at nearly 25 percent and little hope for improvement this year. Prime Minister Mariano Rajoy’s government has imposed a wave of austerity measures since he took office in December that have raised taxes, made it cheaper to hire and fire workers and cut government funding for education and health care.
DiLorenzo reported from Paris. Associated Press writers Juergen Baetz in Berlin, Slobodan Lekic in Brussels, and Alan Clendenning and Harold Heckle in Madrid contributed to this report.
By Tom Harris and Madhav Khandekar
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