Spain hails aid as victory for the euro

Euro Zone: Spain's prime minister has hailed a €100 billion loan deal for the country's banks. But investor focus may now turn to the next troubled spot in the euro zone.

Spanish prime minister Mariano Rajoy yesterday applauded a €100 billion (Dh459.3bn) rescue plan for the country's troubled banks as a victory for the future of the euro. AFP PHOTO/ DANI POZO
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Spain's prime minister yesterday applauded a €100 billion (Dh459.3bn) rescue plan for the country's troubled banks as a victory for the future of the euro.

It follows euro-zone finance ministers' agreeing on Saturday to lend Spain cash to help its banks hit by bad property loans.

"The European project, the future of the euro and our banking system all won new credibility yesterday," Mariano Rajoy said during a news conference. "This is a clear message that the euro project is irreversible.

"Europe has been up to the challenge."

He said Spain had not been put under pressure from the European Union to agree to seek help for the country's banks.

"I was the one putting pressure," he said. "I'd like to know why this deal wasn't reached earlier."

During negotiations, Spain battled to avoid the aid being seen as similar to the bailouts provided to Greece, Ireland and Portugal. Officials were worried the aid would spook the investors Spain needs to help it to plug a budget deficit that is expected to drop to more than 5 per cent of GDP this year.

Unlike Greece, whose economy has been hardest hit by the crisis, Spain's troubles are linked to soured loans extended to a deflated property bubble rather than huge government spending.

"If we [the government] had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain," said Mr Rajoy.

But as the ink dries on Spain's loan deal, investor focus today is likely to shift to other trouble spots in the single-currency area.

"Even if the loan does succeed in stabilising Spain momentarily, any perceived success for the euro zone as a whole may be short-lived if it is eclipsed by bad news from Greece's election in a week's time," Tim Fox, the chief economist at Emirates NBD, wrote in a research note yesterday.

Elections in Greece on Sunday could lead to a victory for the leftist Syriza party, which wants to renegotiate the terms of the country's bailout. International lenders have said the government must meet its reform pledges if it is to receive further loan instalments.

Investor concern may also zero in on Italy after Moody's Investors Service warned that Spain's banking troubles could be a "major source of contagion" for Italy.

The rate on benchmark 10-year Italian government bonds on Friday rose to 5.745 per cent, while the rate on Spanish bonds went up to 6.192 per cent.

Like Spanish banks, Italian lenders have snapped up large amounts of domestic government bonds in recent months as international investor demand has waned. But the move has raised their exposure to the euro-zone debt crisis.

* with news wires

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