Last week the outlook for Australia’s economy was looking pretty rosy with the announcement of strong gross domestic product figures and low unemployment rates.
But with the news on the weekend that Spain’s banks have to be bailed out to the tune of $A126.5 billion, it’s time for smart entrepreneurs to sit down and take stock of what’s happening.
The Spanish bailout has sent shockwaves through global financial markets. Exactly how the ripple effects of that event will touch Australian SMEs is a little harder to read.
With this in mind, we’ve developed a special SmartCompany Q&A to examine what happened, why it happens and what it all means.
Last week all the economic news was good. What the hell happened on the weekend?
Spain became the fourth nation to officially request financial aid from its euro zone counterparts over the weekend, requesting up to 100 billion euros to recapitalise its troubled banks.
The request came a day after Fitch downgraded the nation’s credit rating from A to BBB.
Spain becomes the fourth and largest euro zone economy to get a bailout, with the cash injection adding to the almost 400 billion euros already pledged to Greece, Ireland and Portugal from various sources.
Should Spain end up requesting the full 100 billion euros, it will add about 10 percentage points to its government debt, which is currently around 80% of GDP.
What’s the thinking behind the bailout?
The hope is that the bailout will provide a firewall between Spain’s banks and their sovereign bond market, preventing the bond market from blowing up as well.
At this stage, it is unclear what conditions have been applied to the bailout. But Finland is already demanding collateral for its share of the loan, as it did with Greece’s second bailout, should the money come from the temporary European Financial Stability fund.
It’s possible the funds could be dispersed via a fast-tracked new permanent European Stability Mechanism fund, which has better security for taxpayers.
But the ESM means further subordination of private sector bondholders – not something that will make selling debt any easier for Spain in the months ahead.
CommSec economist Savanth Sebastian told SmartCompany there had been a lack of clarity and detail about the terms and conditions for the bailout.
“Overnight, we saw the wording provided by EU officials contradicts what the Spanish prime minister has been saying about levels of supervision,” says Sebastian.
“The question is where does the new debt rank in Spain’s current debt profile? Private bond holders will want to know this.”