Eurozone can foot the bill of Spain bailout, for now

(BERLIN) - As Spain joins Greece, Ireland and Portugal in the queue for EU handouts, experts said the total bill of half a trillion euros can be met by the bloc's existing rescue funds, at least for the time being.

At the weekend, Spain clinched a lifeline loan of up to 100 billion euros ($125 billion) for its crisis-wracked banks.

The deal sent global stock markets and the euro soaring after Europe, and its paymaster Germany in particular, had come under intense pressure from around the world to take action to prevent problems in Spanish banks blowing up into a fresh eurozone crisis.

The cash comes on top of 240 billion euros in aid promised to Greece, 85 billion euros to Ireland and 78 billion euros to Portugal, bringing the overall total since the start of the debt crisis to 503 billion euros.

Astronomic as the sums may sound, they can be absorbed by the current rescue mechanisms in place, without fiscally sounder countries such as Germany having to dig much deeper into their pockets, at least for now.

But analysts are concerned whether the Spanish bailout, which currently only involves its banking system, will be enough and the country -- Europe's fourth-biggest economy -- may itself need rescuing soon.

"Spain's banking bailout may help to pull the country away from the centre of the eurozone storm for a while. But we doubt that it is the only support that the country will need," said Capital Economics economist Jonathan Loynes.

While the 100 billion euros was more than twice the minimum required amount estimated by the International Monetary Fund, "there will be suspicions that the full extent of Spanish banking losses has not yet been uncovered," Loynes warned.

"At the same time, the poor economic outlook will also maintain concerns that Spain will at some point require a government bailout too," he concluded.

The eurozone has in fact two different bailout mechanisms: the European Financial Stability Facility or EFSF, set up in spring 2010, and its successor, the European Stability Mechanism or ESM, which is due to come into operation on July 1 and will be a permanent body.

The EFSF has up to 440 billion euros at its disposal to help cash-strapped states, while the ESM's firepower is up to 500 billion euros and the two will operate in tandem until 2013.

Thus, with Spain now also coming cap in hand to its EU partners, the bloc's common purse looks at first sight to be coming under increased strain.

Nevertheless, that does not take into account aid previously made available by the IMF or coming from other European mechanisms.

In addition, around half of the Greek aid is being made available under bilateral agreements, independent of the EFSF or the ESM.

"The two coffers are still full," Berenberg Bank economist Holger Schmieding told AFP.

"Member states' current finances aren't going to change."

On top of this, member states will only be left to foot the bill if the countries receiving the aid cannot repay the money.

Under the terms of the bailout funds, the stronger a particular national economy is, the greater its exposure. Germany, for example, guarantees around 27 percent of the ESM, France 20 percent, Italy 18 percent and Spain 12 percent.

Such guarantees enable the EFSF and the ESM to borrow from the markets at favourable rates and then lend the money on to the debt-wracked countries.

For economists, a key question is whether the Spain will apply for the aid from the EFSF or wait until the ESM is up and running.

Deutsche Bank economist Gilles Moec believes it would be in Madrid's interests "to make its application to the EFSF," since the EFSF's statutes offer better protection to private investors lending to the fund.

Germany, as number-one guarantor, would prefer the ESM take charge of the Spanish dossier because its structure offers better protection to fiscally sound countries.

In the case of the EFSF, the countries receiving aid are excluded from the list of guarantors, leaving financially sound states to bear the burden in case of non-payment.

Belgium, for example, has calculated that if Spain applies for the aid from the EFSF, it will see its public debt ratio increase by 0.2-0.3 percentage points.

By contrast, under the ESM, which has its own funds and where all member states act as guarantors, even if they are on a financial lifeline themselves, any new aid does not increase the burden for the contributing states.

Where the Spanish aid will come from will also depend largely on Germany itself, since it has not yet ratified the ESM, even though Chancellor Angela Merkel hopes to do so before the German parliament's summer break.