FactCheck Q&A: how much will the Spanish bailout cost the UK?
Spain’s economy has come close to hitting the skids.
A cascade of economic woes has come to a head, and the Spanish government has hinted that nothing short of a multi-billion euro bailout would stave off the wolves from the door.
That might mean that the UK has to stump up some more cash to revive a critically-ill continental economy. Previous attempts to shore up European neighbours haven’t always gone down well among Tory Eurosceptics on the backbenches.
FactCheck set out to try and find out how deep Whitehall may have to dig.
Why does Spain need a bailout?
It wouldn’t be politically popular for the Spanish government, but it might be their best bet.
Spanish banks are failing to handle losses from a 2008 property crash, despite a series of reforms, and it’s in its second recession in quick succession.
Borrowing costs have rocketed, and interest rates on Spanish 10-year bonds peaked yesterday at 6.512 per cent – which is perilously close to the seven per cent red line.
So Spain has said it’s been shut out of the credit markets, and it can’t pay for what it needs.
Doesn’t help if public sector debt’s expected to reach 80 per cent by the end of the year, according to Spain’s finance ministry – potentially a conservative estimate – a considerably greater sum may be required.
How much will the UK contribute towards the Spanish bailout?
Obviously, it depends on whether Spain will ask for a bailout. The general consensus is that they will, if not sooner, then later.
Sources in the Treasury have told FactCheck that they’re working on contingency plans on the basis that yes, Spain will ask for a bailout, and yes, the UK might have to contribute.
As to how much the bailout itself may be – economists say it’s a bit like chasing a moving target. It’s a 50bn to 450bn euro question, maybe more.
HSBC has reportedly prepared reports for clients suggesting that over three years, the costs of a bailout for Spain would be 450bn euros to recapitalise banks and finance government debt.
Meanwhile, JP Morgan is working on a figure of a bailout of around 350bn euros – for banks and government costs – until the end of 2014.
If Spain does need the full 450bn-odd euros, as some have predicted, the IMF would probably need to step in.
In previous bailouts for Greece, the IMF contributed 27 per cent; for Ireland and Portugal, it stumped up a third, and it’s thought it’d do the same for Spain.
If they went for the maximum that they’ve previously given – a third, they’d provide 150bn at highest guess (according to HSBC’s estimates), or 116bn euros with JP Morgan’s estimate.
As a member of the IMF, the UK has traditionally contributed 4.5 per cent to any IMF funding.
So that would mean that if Spain asked for a 450bn bailout, the UK might be liable for 6.75bn euros. If Spain were to ask for 350bn in rescue funds, the UK would be liable for 5.22bn of that.
The Treasury wouldn’t confirm what kind of figures it was dealing with.
How would that go down in the Tory backbenches?
The Commons has already said the Treasury can draw down an extra £10bn to give to the IMF, after a vote last July in which 30 Conservative MPs rebelled.
Any more than that, however, and it would trigger an extra vote in the Commons.
That might prompt some Tory rebellion, but even with the higher sums, it’s unlikely the matter will reach a vote.
Matthew Hancock MP has previously argued that the eurozone, not Britain, should deal with its own problems.
But in this case, if Britain were to contribute via the IMF, “I would be very happy for the UK to contribute to the IMF. The broad majority of MPs support it because it’s being a member of the IMF, which is part of the world economy,” he told FactCheck.
Is there any way the UK wouldn’t have to contribute to a bailout?
Citigroup, are working on the basis that the bailout will be needed to save the banking sector only, and say a higher figure would be in the region of 100bn euros.
If Spain decides that it only needs cash to save the banks, then the UK may not be asked for money. Sources at Citigroup say they consider it likely that the bailout could come from the existing European bailout fund, the European Financial Stability Fund. That’s got around 250bn left after the Irish, Portugese and Greek bailouts.
So it’s unlikely the UK would come into play.
But even Citigroup accept that their assumptions are constantly under review – Spain may end up needing a far bigger bailout.
Will the UK ever get it back?
Because it would be a loan through the IMF, it would be treated differently to if it were to go through the European rescue funds.
The IMF generally asserts itself as the most senior creditor of a country, which means that of all the people a borrower would pay back, the IMF would come first. In the history of IMF programmes, it’s rare to not get loans repaid.
That, and the fact that it’s seen as international, rather than European, is a reason it’s been acceptable.
Dr Stephanie Hare, a senior analyst for western Europe at Oxford Analytica, said: “Britain, for political and ideological reasons, does not contribute to the European mechanism.
“So for contributions to the IMF, it’s seen as contributions to the IMF area, not just Europe.”
So will Spain be out of the woods then?
A big feature of the financial crises, from the Lehman Brothers, to Greece, was that very little was really known about what money was where, or indeed, where it wasn’t.
Things may turn out to be far worse in Spain then people have imagined.
Likewise, if the anti-austerity Syriza win elections in Greece later this month, potentially leading to the country’s exit from the eurozone, all bets as far as a Spanish bailout could still be off.
Dr Hare said: “If people worry that Greece will exit, then we will see borrowing costs for Spain increase, because it will be deemed to be at greater risk.”
It gets worse, depending on Italy’s economic future. “If Italy goes, there is an entirely new country that we can’t afford to bail out,” Dr Hare said.