Leading article: The right move – but it still may not save Spain


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The Independent Online

After months of bad headlines, in which EU leaders have been blasted for doing too little too late to douse the flames engulfing the eurozone, it is not surprising that the haste with which those same leaders agreed terms for a generous bailout of Spain's troubled banks produced the opposite effect. The IMF, the United States and, of course, the Spanish government have all chorused their approval, both about the size of the promised loan, £81bn, and about the absence of strings attached – the latter a measure of the respect with which even a leader as notoriously hard to please as Germany's Angela Merkel accords Spain's existing measures to deal with its crisis.

The Spanish Prime Minister, Mariano Rajoy, yesterday insisted that the loan intended for his country's weakest banks had lifted the overall threat to Europe's fourth-largest economy. With Europe deploying the financial equivalent of heavy artillery on behalf of Spain's embattled banks, confidence was about to return, he predicted, specifically pledging that credits would start to flow again into small and medium-sized businesses.

Mr Rajoy's optimism is infectious and, everyone hopes, well founded. But whether Europe has collectively solved a key component of the European economic crisis, or just averted trouble for another day, won't become clear for a while. The fate of the bailout does not lie in Spain's hands but in those of the dreaded markets whose reactions will take time to become known. Past form suggests that, following a bailout, market confidence rallies in the short-term, as everyone shares in the feeling of relief that an imminent catastrophe has been averted. But then the initial relief starts to seep away, as doubts over the long-term solvency of the economy return. We just cannot tell at this juncture whether the size of the bailout and the speed with which it was agreed will restore lasting confidence in Spain, or whether the silent flight of capital within the eurozone, out of the south and into a couple of fortress economies, like Germany's, will start to resume. In that case, interest rates on Spanish loans will rise to the point where they become unsustainable.

This then raises questions about whether a second, bigger bailout – for the Spanish state, not for the banks specifically – might be needed down the line, which in turn raises other key questions, starting with how finite the resources of the bodies lending money to Europe's sick economies really are. There is no doubt that the eurozone can manage a loan of £81bn. But what if Spain needs a bigger loan later on, and is then followed by Italy, which has not requested any such help as yet? Meanwhile, we don't even know precisely where the promised £81bn is coming from; the Financial Stability Facility or its permanent replacement, the European Stability Mechanism. Either way, if any confusion arises concerning the source of the money, or if last-minute hitches threaten to snag its prompt disbursement, Sunday's upbeat mood can be expected to fade.

The other imponderable concerning the Spanish bailout is its potentially destabilising political effect on the other countries in crisis, starting with Ireland, Portugal, Italy and Greece. After seeing Spain get what they view as an easy ride from a normally tight-fisted Europe, meaning Germany, they are likely to start querying the rigorous terms of their own bailouts. Why so many strings for us, yet so few for Spain, they will ask.

The explanation, at least from the German point of view, is that Spain is already doing all that anyone could require of it, which is more than could be said for Greece. But it may not be enough to stop Dublin, Lisbon and Athens from demanding the chance to renegotiate their own bailout terms.