Greece might be teetering toward expulsion from the eurozone
but Spain's situation is now the focus of concern. If such a major
economy were to fail, the repercussions could cause unprecedented havoc
across Europe -- and the globe.
Just how bad is the pain in Spain?
This week Spain's
treasury minister Cristobal Montoro bluntly admitted it was "technically
impossible" for Spain to bail itself out, and that the country needed
help to access funds.
The country is facing a
credit freeze after its financial problems were thrown into sharp relief
by the bailout of Bankia, the country's fourth-largest bank.
Bankia last month called
for €19 billion ($23.7 billion) of assistance, panicking markets. It
sent Spain's cost of borrowing (for the sovereign ten-year bond) toward
7% -- a level which is regarded as unsustainable and has precipitated
bailouts of other euro countries.
Spain's former Prime
Minister Felipe Gonzalez last week warned the country is in a state of
"total emergency" and that the crisis is proving to be the "worst we
have ever lived through."
But Spain -- in its second recession since 2009 -- has been dubbed "too big to bail, too big to fail."
The Spanish economy is
the eurozone's fourth-largest -- after Germany, France and Italy --
making up around 11% of the bloc's GDP.
To put that in
perspective, Greece, Portugal and Ireland -- the three eurozone
countries which have already been bailed out -- combined make up less
than 6% of the bloc's economy.
How did Spain reach this point?
Spain's banking sector
is facing up to years of bad investments, largely in real estate, which
was buoyed by cheap credit and the country's sunny climate.
Its housing boom-times
of 2002 to 2008 were fed, in part, by retired north Europeans buying up
second houses in places such as Valencia and Murcia, according to
political scientist Julio Embid, of think-tank Fundación Alternativas.
Families also bought up
expensive houses with long mortgages during this time, he said. When the
economy collapsed in 2008, people lost their jobs -- and with them
their homes.
Real estate prices have
now fallen some 30% to 50% from their highs, leaving Spain's banks, or
cajas with housing stock on their books whose current value is much
lower than the original.
Meanwhile hundreds of
thousands of houses built during the boom remain unsold, and people
wanting to buy may find it difficult to get credit.
Embid also points to the
cajas' politically-driven executive appointments as a contributing
factor to the crisis. "Many senior bankers were low-profile regional
politicians or majors, without any financial experience or bank
background," he said.
What has Spain done to try and sort through this mess?
The government set up
the FROB (Fund for Orderly Bank Restructuring) in 2009, to help
reorganize its banking sector, and has received international
recognition for its efforts to date.
According to April's
International Monetary Fund report, the country has reduced the number
of financial institutions from 45 to 11. The report noted: "The
authorities are, rightly, focusing on strengthening the banking sector."
It said the authorities
were showing "an appropriate sense of urgency" but also warned that
"unless the weak institutions are quickly and adequately cleaned up, the
sound banks will suffer unnecessarily by a continued loss of market
confidence in the banking sector."
As it stands, the banks have an estimated €300 billion of problem loans on their books, with the full cost of recovery not yet clear.
What other headaches does Spain face?
In addition to the financial sector's problems, Spain could be liable for the debts of several regional governments, which have been hit with ratings downgrades.
Spain also has an unemployment crisis, with more than half those under 24 out of work,
and almost one in four people overall. Spain's jobless rate has helped
pushed the eurozone's total unemployment rate to 11% -- its highest since the eurozone was created in 1999.
The IMF is now in the country for its annual economic review, with the mission expected to last until the middle of the month.
Why is the economy collapsing now?
The situation in Spain is developing like a "perfect storm," with money being pulled out of the country, despite the desperate need to stem capital flight and support its banking system.
This leaves Spain in a
precarious financial state, driving investors away, pushing up its
borrowing costs and making it more likely to need a bailout.
It's a reminder of how
governments are inextricably tied to their country's banking systems,
essentially the lifeblood of their economy.
In Ireland, the banking sector's similar gorge on property forced the country to take a €67.5 billion bailout in 2010.
The mood of the markets
may, ultimately, dictate Spain's ability to pull itself from its
financial hole.
Investors already twitchy about the prospect of a
"Grexit" -- a Greek exit from the euro -- will react badly to further
bad news out of Spain.
Ratings agency Standard & Poor's has put the chance of Greece exiting the euro at around one in three, but says the impact of such an outcome on other countries is not yet clear.
While it seems likely to
increase the chance of other countries departing, S&P says other
countries "would be unlikely to follow ... having witnessed the
resulting economic hardships and long delay in harnessing benefits from
national currency devaluation."
The struggles in Europe
were exacerbated by miserable news out of the U.S. last week, with
official figures showing just 69,000 jobs were gained in May compared to
expectations of 150,000.
Where does Madrid stand when it comes to making cuts to public services?
Spain's emergence as the crisis epicenter has again fed debate over the value of austerity over stimulus.
Greece, the first euro
country to take a bailout, has been swallowing austerity medicine since
2010. But its economy has slid further into recession, and initial hopes
it could detach itself from external life-lines within two years now
look wildly optimistic.
The ruthless drive to
cut costs has instead created a backlash against the politicians that
support the plans. Greeks head back to the polling stations on June 17
after the first election in May failed to deliver a government, and it
is not clear if voters will fall behind their European paymasters, or
vote to reject their demands.
Spain has also been
implementing austerity measures to try and combat its crisis. The
retirement age has been raised from 65 to 67, while public sector wages
and welfare payments have been cut.
Conservative Popular
Party leader Mariano Rajoy, who won a landslide victory over the
Socialist Party in November 2011, focused on cost cutting and labor
reforms. But, as with other fragile countries within the euro bloc,
Spain's economy remains weak and its unemployment levels continue to
rise.
Some European leaders
are now voicing concerns against austerity measures, including Italian
Prime Minister Mario Monti who has warned of a backlash against such
policies.
Academics and financiers
are also wading into the policy debate, with billionaire George Soros
saying in a speech this month that the "wrong remedy" has been applied
to the crisis. "You cannot reduce the debt burden by shrinking the
economy, only by growing your way out of it," he said.
Soros said he believed
there was just three months to correct mistakes and reverse trends. And
that, he said, would require "extraordinary policy measures."
So what's next for Spain?
Spain's auction of
government bonds -- to fund government spending -- was Thursday, and
raised just over €2 billion. Spain's 10-year borrowing costs went up to
6.1%, compared to 5.8% the last time such bonds were auctioned.
The country also faces a
bond repayment of almost €13 billion next month, with another €20
billion due in October. While the July repayment is expected to be
covered, the October bill could prove problematic, according to Symonds.
"By this time we should have some more of an idea of just how much will
be required to recapitalize the Spanish banks," he said.
In a much-awaited
report, the IMF estimated Friday that Spain's banks need at least €40
billion (about $46 billion) in fresh capital to preserve the country's
financial stability.
The IMF assessment --
roughly in line with that of ratings agency Fitch -- comes on the eve of
critical talks between the Spanish government and European institutions
over the terms of aid to Spanish banks, which are saddled with bad
debt.
Across Europe, policy makers continue to try and stem the crisis, including plans announced Wednesday for a coordinated banking union that
would deal with future crises rather than national governments.
European Commission President Jose Manuel Barroso said the proposal was
"an essential step" toward a banking union that would make the sector
more responsible. But it won't be in place in time to tackle Spain's
immediate banking crisis.
Focus also remains on
Greece as it heads towards the election, playing what Schroders chief
economist Keith Wade calls "financial chicken" with the European Union.
But is not yet clear who will blink first -- or what the outcome will mean for Greece, Spain, and the future of the euro.(Irene Chapple per "CNN")
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