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Spain Squeezed by Eurozone Bailout Deal
The move is part of an agreement Spain's Prime Minister Mariano Rajoy made when he accepted a Eurozone bailout for his country's ailing banking system. Rajoy surrendered to mounting pressure to at least make an effort to avoid a full state bailout.
"We have very little room to choose. I pledged to cut taxes and now I'm raising them. But the circumstances have changed and I have to accept them," Rajoy told the national parliament.
As protests erupted from anti-austerity crowds that gathered in Madrid, Rajoy explained plans to roll back social welfare protections and immediately raise taxes so that he could secure emergency aid and placate jittery investors.
Rajoy announced higher taxes and cuts to unemployment benefits, union pay, and civil service perks.
Amid boos and heckling, Rajoy told the parliament, "These measures are not pleasant, but they are necessary. Our public spending exceeds our income by tens of billion euros."
The moves highlight how Rajoy and Spain are at the mercy of the EU"s tough bailout provisions if the government hopes to get any more money for its struggling banks.
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Eurozone Debt Crisis: Why Cyprus Needed the Fifth Bailout
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Shortly after word came that Spain had formally requested a bailout package for its ailing banks, Cyprus chimed in and also asked for aid.
The Mediterranean country has become the fifth Eurozone nation to hold out its hand for an international rescue. While the smallest of the bunch to seek relief, Cyprus highlights the European Union's increasingly stressed resources as it wrestles with weakening economic conditions.
The aid request followed Fitch's downgrade Monday of the island's stressed banks to "junk" status. The credit cut means the country has lost it investment status with the trio of the largest and most influential rating agencies.
Fitch said in a statement, "Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability."
Cyprus, saddled with Greek private sector debt, could need as much as 10 billion euros ($12 billion) in bailout funds.
"Classic contagion, "BBC's chief economics correspondent Hugh Pym said of Cyprus' troubles.
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Spain Bailout Package of $77 Billion Will Not be Enough
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Spanish economy minister Luis de Guindos formally asked Eurozone partners for up to 62 billion euros ($77.4 billion) to recapitalize his country's ailing domestic banks. The financial institutions are weighed down by bad loans to property and construction companies, and by an ongoing Eurozone debt crisis.
In a letter to the Luxembourg Prime Minister Jean Claude Juncker, who serves as head of the 17-nation Eurozone finance ministers, Guindos explained he wanted to settle on details and conditions of the loan before the next euro group meeting on July 9.
Juncker acknowledged receipt of the letter and said that the ministers expect to give a go-ahead to the European Commission, the European Central Bank and the European Banking Authority to negotiate terms of the bailout.
The request was anticipated after the results of two independent audits were released last week. Financial consultants Oliver Wyman and Roland Berger made the first step in a two-part audit of the Spanish banking system.
Wyman found that worst-case scenario, Spain's banking sector would need a bailout package of between 51 billion euros ($63.6 billion) and 62 billion euros ($77.4 billion). Berger estimated on the lower end with 51.8 billion euros ($64.6 billion).
The formal request for a Spain bailout has made investors more nervous, and is driving the bond yields higher, making it increasingly likely Spain will need more money to try and resolve its debt crisis.
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Eurozone Bailout Package: What's Next for Greece
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But Greece's trials and tribulations are far from over, and the relief is temporary. Concerns are increasing over the global cost of a Eurozone bailout package as the mounting woes in Spain and Italy persist.
Citizens of Greece are clamoring for change, but many recognize that the election results are no quick fix. There was no cheering in Greece and global markets reacted cautiously following the vote.
Borrowing costs across Europe rose with Spain taking the lead. The yield on Spain's 10-year bonds spiked to a euro-era high of 7.18%. A reading above 7% raises a red flag that a nation may be approaching the need for a bailout.
Italian bonds also sold off on fears that if Spain is in need of a bailout, an Italy bailout package might not be far off. Italian bonds' 10-year yields are around 6%.
While the Greek election results staved off a calamity, they failed to fix the wider problems facing Greece and its struggling neighbors.
Moody's Analytics' chief economist Mark Zandi told USA Today, "We dodged a bullet, but they've got more bullets coming."
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Why an Italy Bailout Package is on the Way
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An Italy bailout package is likely to be the next costly move in the spiraling contagion.
Italy on Thursday held its first bond auction since European finance ministers came to Spain's rescue, willing to give the ailing country up to 100 billion euro ($126 billion) to shore up its beleaguered banks.
The auction raised a heap of concerns.
Italy's borrowing costs soared following a Treasury sale of 4.5 billion euros of debt, including 3 billion euros of its 3-year benchmark bond that yields a lofty 5.3%. That was the highest yield since December and an increase of nearly 1.4 percentage points from the last sale just a month ago.
In addition, Fitch Ratings reported May 23 that foreign ownership of Italian debt slipped from 50% in 2008 to a current 32%.
"I think Italy could well be a problem, because its current government isn't very good and has no legitimacy, having been imposed by the EU - and it hasn't cut spending as it needs to," said Money Morning Global Investing Strategist Martin Hutchinson. "I'd put it a few weeks away though - market's focused on Greece and Spain at present."
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Why the Spain Bailout Package Won't Work
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Following the announcement of a $126 billion (100 billion euro) bank rescue package, markets rose briefly. But the relief was short-lived as investors hastily refocused and remembered that the struggling Eurozone still faces a number of key obstacles.
The Dow Jones Industrial Average lost 142.97 points, or 1.14%, to close at 12,411.23.
Spain's bailout package was assembled swiftly as EU officials attempt to stave off suppositions about the country's sickly banks with crucial Greek elections just a few days away.
But it falls short of resolving what the Eurozone as a whole is up against.
Banking analysts at Societe Generale summed up in a note to clients, "The plan looks like a classic Eurozone fudge."
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Eurozone Debt Crisis: Why the Next Three Months are Crucial
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