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Rescue loans for Spain's banks buys Europe time

WASHINGTON — A $125 billion plan to rescue Spain's banks is not expected to solve Europe's debt crisis or ease the pain of double-digit unemployment across the continent.

But it is likely to calm financial markets and buy time for European policymakers to work with other weak economies threatening the stability of the 17 countries that use the euro.

Europe still has plenty of troubles to address in the three other countries that have received financial help — Greece, Portugal and Ireland. In Greece, voters could elect a government next week that will refuse to live up to the terms of the country's $170 billion rescue package. Portugal is combating high debt and 15 percent unemployment. Ireland is cleaning up a banking mess a lot like Spain's.

Then there's Italy, the eurozone's third-largest economy, where government debt is piling up as the economy stagnates.

"We still have some pretty fundamental problems to solve," said Nicolas Veron, senior fellow at the Bruegel think tank in Brussels. "We need more radical solutions than this one."

Spain on Saturday asked finance ministers for the 17 countries that use the euro for money to rescue its banks, which have been crushed under the weight of bad real estate loans. The finance ministers responded by offering up to $125 billion in loans that the Spanish government could funnel to banks.

The plan eases a crisis in the euro's fourth-largest economy. The deterioration of Spain's banks and the need for a rescue were threatening to bankrupt its government. That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland.

"This move brings into sharp relief the enormous amount of money that will be needed to cordon off the rest of the euro zone periphery in the event of a Greek meltdown," said Eswar Prasad, professor of trade policy at Cornell University.

Investors are worried about what will happen when Greek voters go to the polls Sunday.

If Greece reneges on the strict austerity measures that come with its rescue package, it could be forced to abandon the euro. Greece's departure from the eurozone would likely cause financial chaos across Europe: Greek debts would go from being denominated in sturdy euros to being denominated in Greek drachmas of dubious value.

Worse, a Greek exit from the euro would raise fears that another European country such as Portugal or Italy might be next.

"A significant part of this (bailout for Spanish banks) has to do with ring-fencing Greece," said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. "This is enough to prevent added market contagion."

But analysts said bolder action may be needed from key European governments and institutions that have been leery of committing too much to the effort.

Germany, worried that it will get stuck with the bill for any ambitious schemes, has rejected several ideas for easing the crisis. It has been reluctant to ease the terms of previous bailouts to reduce the pain of government spending cuts on Greece, Portugal and Ireland. It also has resisted calls for the creation of eurobonds that would raise money and spread responsibility for repayment across the euro countries.

Likewise, the European Central Bank has been reluctant to intervene to jolt the eurozone economy. It has been reluctant to flood the economy with money to push down interest rates the way the U.S. Federal Reserve has.

The rescue money for Spain will come from pools set up by other euro countries. Spain's government will distribute it to the banks. The banks will pay it back with interest, and the money will go back to the rescue pools. Interest rates and other details had not been revealed as of Sunday.

Unlike Ireland, Portugal and Greece, Spain did not have to agree to deeper cuts in its government budget to secure the help.

Spain has already agreed to government belt-tightening. More austerity likely would have pushed Spain, already suffering from near-25 percent unemployment, deeper into recession.

"You don't want an economy of that magnitude going down the tubes," said Daniel Drezner, a professor of international politics at Tufts University in Medford, Mass. Spain has the world's 13th-biggest economy, more than four times the size of Greece's.

The troubles in Europe also are causing economic problems for the United States and developing countries such as China and Brazil, which rely on Europeans to buy their exports. So the plan unveiled Saturday eases pressure on the United States and the rest of the world economy as well.

"Anything that calms European markets is good for the United States," Drezner said.

Europe still needs to find a way to stimulate economic growth across the continent so that countries can begin to grow their way out of their debt problems.

Despite the bank deal, Spain's grinding economic misery will get worse this year, Prime Minister Mariano Rajoy said Sunday. The conservative prime minister said the economy will shrink by 1.7 percent and more Spaniards will lose their jobs, even with the help.

"This year is going to be a bad one," Rajoy said.

Rescue loans for Spain's banks buys Europe time 06/10/12 [Last modified: Sunday, June 10, 2012 11:55pm]

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