How the Spanish Bailout Affects Portugal

Spanish bailout - What it means to Portugal

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When Spain’s banks got into trouble, it took some time for the government to admit that the economy might collapse unless a bailout was granted. When this bailout finally occurred, European finance ministers loaned Spain €100 billion. This money was used to get these banks out of their hole, although there are worries that the Spanish government might also need a bailout, unless things improve.

The first thing to remember is that his bailout was much different from the bailouts received by Greece, Ireland and Portugal. These other countries needed money to keep their entire countries afloat, while Spain needed the money for strictly its financial sector. This occurred because the housing marketing in the country crashed and banks were left holding toxic loans that they could not afford to cover. The reason why Spain borrowed this money from the European Union rescue fund was that they could secure lower rates by doing things this way.

In regards to Portugal, there are worries that Spain will pay lower interest rates because Spain did not need an entire economic bailout. Spain was in financial turmoil, but this was a problem that was caused by its banks, rather than the country’s government. The fear was that the rest of the economy would crash if the banking industry did, which is why Spain was granted this money.

At the same time, however, Portuguese Prime Minister Pedro Passos Coelho does not plan to renegotiate the terms of the country’s loan because the market conditions are different. He does believe, however, that if Spain received better terms than other countries, this information should be shared with the other countries and the reasoning should be made public.

The money that was made available for Spain comes from the European Financial Stability Facility and the European Stability Mechanism. These two funds are essentially the same thing, as the EFSF was a temporary fund that was remained as the ESM. These loans must be repaid before any other loans, however, since the money must be replaced to deal with the next crisis.

Essentially, this bailout was paid for by the taxpayers in the European Union. One thing to keep in mind, however, is that countries that are receiving financial aid from this fund did not have to contribute under the EFSF, but will have to under the ESM. As a result, the Portuguese taxpayers will be partially responsible for bailing out Spanish banks under these laws.

Because other countries are paying for Spain’s banking woes, many have asked whether this banking industry will now be supervised in the country. When Portugal and other countries received a bailout, the money was highly supervised by the European Union. While Spain’s money will be watched by the European Commission, International Monetary Fund and the European Central Bank, the Spanish Prime Minister does not believe that he has the same restrictions as others who have received bailouts.

Although €100 billion seems like a lot of money, some believe that it might not be enough. Initial estimates states that the situation could be stabilized with only €37 billion, which is a number that came from the IMF. Since the Spanish government is known for underestimating its own problems, however, as some now believe that even more money will be needed in the future. Only time will tell if this initial injection of capital is enough to handle the Spanish banking industry’s problems.

In Portugal, we are seeing the banks running into additional problems already. The three largest banks in Portugal have received a €6.6 billion injection and most of this money came from the bailout that the country previous received. Bankers within Portugal are fine with Spanish banks using European Union funds because it avoids the creation of additional risks within the Portuguese banking industry. Since Portugal is reliant on Span economically, seeing the Spanish economy crash could prove disastrous.

Something that has been proposed to alleviate these financial concerns in the European Union is the creation of a Euro bond. If issued, these bonds could help most countries get out of debt by bringing an influx of cash almost immediately.

The current problem is that Germany would have to underwrite these bonds to cover for less economically viable states. Germany will not do this, however, since it would have to take much of the risk and would not have as much to gain as any of the other states.

Overall, Spain and Portugal are not out of the economic woods and they still have to be careful moving forward. The countries, however, are much stronger than they were in recent years and are more viable for foreign investment. Local citizens, however, should still be wary about using these banks if they have significant savings. If you have a savings account that is currently above what the national guarantee scheme offers, it is a wise idea to contact a wealth management company.

A wealth management firm can come up with a plan for you to protect your money, which is extremely important right now. Without this protection, it would be possible for a bank to lose your money and not have to repay you once this happens. In addition, if your bank happens to close down suddenly because of these issues, you would not be eligible to receive your money.

Wealth management firms are able to diversify your savings and investments, so that there is very little chance of you losing your money. As we have seen, Portugal and Spain are very closely tied financially; therefore, you should always keep an eye on the Spanish economy and adjust your investments accordingly.


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Published in: Business / News and Updates / Portuguese Life