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Eurozone must act quickly to halt financial crisis

Publication Date : 14-06-2012

 

The Spanish economy, the fourth largest in the eurozone, has deteriorated because of a business slump that followed the collapse of a property bubble. This forced the country to seek a financial bailout.

Spain is the fourth eurozone nation following Greece, Ireland and Portugal to seek financial help since the European sovereign debt crisis began in 2009.

If the Spanish crisis spreads, it may trigger further chaos in world stock markets, including those in United States, Europe and Japan, and the yen will continue strengthening against the euro. These developments will deal a serious blow to the world economy.

The debt crisis has repeatedly affected Europe because of its failure to take prompt action. The current crisis must be contained quickly.

Seventeen eurozone countries have agreed to lend up to 100 billion euros (about US$125 billion) to Spanish banks, which are beset by huge bad debts. Loans from the European Financial Stability Facility, among other entities, will be used to help recapitalize struggling Spanish banks to halt credit uncertainty.

Preemptive measure

Bankia S.A., a major Spanish bank mired in a management crisis, had asked the Spanish government to bail it out by injecting public funds. But the government, already struggling to fix its fiscal mess, could not afford to provide funds.

Realising the Spanish government would not be able to rescue Bankia and other Spanish banks by itself, the 17-member eurozone decided to provide financial aid as a preemptive measure. We consider this decision reasonable.

Greece, which triggered the European debt crisis, will hold another election Sunday. If an antiausterity leftist party joins a new government after the election, it cannot be ruled out that Greece will break away from the eurozone. This would inevitably cause turmoil.

Ahead of the Greek election, the eurozone joined hands to address the Spanish crisis to prevent it from disrupting financial markets.

Outlook uncertain

However, uncertain prospects lie ahead.

The eurozone has agreed on a broad framework of bailout plans for Spain but concrete details and the exact amount of rescue loans have been left pending. Besides working out concrete measures quickly and implementing them promptly, the eurozone also must tackle the realignment of financial institutions.

While it still grapples with the bursting of the property bubble, Spain is expected to record minus economic growth this year and next. The amount of Spanish banks' nonperforming loans is expected to balloon further due to the protracted business slump. It remains to be seen whether the size of the eurozone's financial assistance will be adequate for dealing with the Spanish crisis.

Assistance to Spain will be limited to the banking sector. Therefore, the country probably will not be asked by the eurozone to work out additional fiscal reconstruction measures.

But fiscal rehabilitation and economic growth are both indispensable for economic rejuvenation. Spain faces a tough challenge.

The European financial crisis will be a major item on the agenda of a summit meeting of the Group of 20 economies to be held in Mexico next week. Pressure is expected to mount on Germany and France, among other countries, to display leadership and unity to end the crisis.

 

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