Spain announces new austerity measures ahead of bailout sign-off
By Sarah Collins | Wednesday 11 July 2012
Spanish Premier Mariano Rajoy has outlined a raft of new budget cuts and tax rises ahead of the final sign-off of Spain’s bailout memorandum, due at a meeting of eurozone finance ministers, on 20 July. Speaking to the Spanish parliament, on 11 July, he said that Spain would show it was “a nation prepared to make sacrifices in the pursuit of a better future”.
The austerity plan, which will shave €65 billion off spending over the next two and a half years, includes salary and staff cuts in local government, a suspension of the ‘second bonus’ for public sector workers, a 20% cut in subsidies to political parties, a €600 million cut in departmental spending, a reduction in unemployment benefits and shrinking the number of public bodies. VAT, tobacco and carbon charges will rise, social contributions will fall and exemptions for first-time house buyers will be scrapped. Spain will also start privatising ports, airports and rail lines. The austerity programme comes after the country was granted an extra year to meet an EU-mandated 3% of GDP deficit target. The government will have to reduce its deficit this year to 6.3% of GDP, from 8.9% last year - a percentage point’s grace on its previous 5.3% target.
Spain applied, on 25 June, for a €100 billion bailout for its banks as it became clear the government could not access financial markets at reasonable rates to fund a major recapitalisation drive. Eurozone finance ministers gave their preliminary approval to a draft memorandum of understanding (MoU) setting out the bailout terms, on 9 July, but will not to formally approve it until 20 July.
A draft MoU, seen by
Europolitics, provides for all banks needing capital to get cash by June 2013, whether from the EU or by raising it themselves. The memorandum also sets out stringent conditions for failing banks, which will be forced to impose losses on shareholders and junior or unsecured bondholders. Holders of senior debt will not be affected. Spain will also set up an asset recovery company to take over toxic real estate and other problem loans from Spanish banks, similar to Ireland’s National Asset Management Agency or Germany’s ‘bad bank’.
Spanish MoU dissected
Aid: An 18-month programme of aid of up to 100 billion euro from the EFSF fund - to be transferred to the ESM when it is operational. A 30 billion euro tranche will be raised in July and held in reserve by the EFSF for emergencies
Conditionality: Mainly for the banking sector, but Spain’s deficit and economic reforms will be “closely” monitored “in parallel”
Stress tests: A third exercise - this time bank by bank - is to be completed by the second half of September on Spain’s 14 largest lenders
Capital requirements: Banks have to meet a 9% capital ratio as of 31 December 2012, lasting until at least end-2014
Recapitalisation: Plans are due by October, to be approved by the Commission between November and end-December. No aid will be paid out before the plans are approved. Banks trying to raise their own capital will have to do so by 30 June 2013
Asset management company: Banks’ problematic real estate assets will be hived off into a separate vehicle, haircut, and an attempt will be made to recover their value. It should be operational by November 2012 and will receive cash from the EFSF
Restructuring plans (for viable banks): These will include asset sales, running off non-core activities, banning shareholders’ dividends and capping executive pay
Resolution plans (for failing banks): Shareholders in banks receiving aid will be the first to take losses, followed by hybrid bondholders and subordinated bondholders. Losses can be forced on shareholders via new legislation to be tabled in August 2012 (powers for FROB)
Executive pay to be capped in all state-aided banks
Cajas: New legislation by end-November 2012 to reduce the government’s stake in the banks to non-controlling levels
Supervision:Banco de Espana to get more powers after an internal review, to be finished by end-October 2012