Dispute Arises Over Spain’s Banking Bailout

Spanish Prime Minister Mariano Rajoy on Wednesday defended the country’s request for EUR100 billion ($125 billion) in aid for its ailing banks, a step he had long rejected as unnecessary.

Fielding questions from his opponents in parliament for the first time since the government was forced to accept the massive loan from the European Union to overhaul the financial sector, Rajoy blamed the previous Socialist government for failing to act swiftly in previous years to address the impact of a property bubble burst on the country’s financial sector.

Finance Minister Luis de Guindos, in turn, told legislators that Spain injected money into its banks three years ago, “we would be singing another song.”

Rajoy said the government has been forced to ask for the EU loan as Spain does not have the resources to rescue ailing lenders on its own.

“Spain failed to overhaul the banking system in 2009,” Rajoy told legislators, as such his government now has to focus on the reform of the local financial sector with EU funds, he added.

Doubts over the deal surfaced in parliament on Wednesday, putting pressure on Rajoy to persuade Spaniards that this plea for external assistance will help improve a dire economic situation.

By agreeing to ask for external assistance to clean up a banking industry strained by a massive housing bust, Spain will become the fourth euro-zone country to request an EU bailout after Greece, Portugal and Ireland. The aid for Spain, however, has exacerbated investor doubts about the ability of European policymakers to bring the euro zone’s long-running debt crisis under control. These worries sent Spanish borrowing costs, as measured by the 10-year government bond, to a euro-era high of 6.72% at Tuesday’s close, up from 6.52% Monday.

Although the EU aid will be channeled through the government, the financial industry will foot the bill, Rajoy said. Conditions attached to the loan will focus on the restructuring of the banking sector and won’t affect society, he added.

Rajoy said implementing structural reforms and lowering the budget deficit remain the government’s top goals, and that Spain’s crisis is linked to broader problems in the euro area, Market Watch reported.