For a country that thirty years ago was rotting under a dictatorship, Spain is a miracle economy. But as Greece and Portugal are finding out, you don’t get prizes for what you invested in that historical transformation. While commentators fixate on the banking crisis in Spain, it’s worth reminding ourselves that the end game should not crush too many of the good things that the Spanish have created.
There is no question that right now Spain is on the brink. At the same time though German banks have Euro 100 billion sunk into Spain, the French have Euro 120 billion and the Dutch over Euro 100 billion. Spain’s outstanding mortgage value is approx Euro 1 trillion. This is not just Spain’s problem. It’s construction bubble was designed to give second homes to north Europeans, everywhere, and the cost of failure is already contagious. Ask all those Irish people who bought second homes in Spain or Portugal.
So the crises has these three elements among others:
The difference between Spain’s borrowing costs and those of Germany yesterday, and today, rose above the 500 spread mark (up to 540). No country has avoided a bailout once it reaches the 500 point mark. It is likely to be only a matter of time.
Spain tried to avoid borrowing on the markets in order to bail out Bankia, the bank that now admits to Euro 40 billion of troubled assets. Instead it wanted to issue bonds that could be redeemed at the European Central Bank, by Bankia. The European Commission, the EU’s administrative arm, wants direct bank bailouts in order to avoid piling on more sovereign debt. Germany and Finland do not want this, as it will embroil them deeper in other country’s banking affairs.
These decisions will take Spain to the edge. The talk in Brussels now is to give Spain what it wants, but organizing direct bank bail outs might just take too long.
Meanwhile, locally, Spain nhas owned up to about $34 billion of regional debts that need refinancing this year. So on top of the bank crisis they have a local debt crisis that can only be solved by very high interest debt that will crush local initiatives.
And finally they now have a real crisis in the productive economy. Retail sales plunged by 9.8% in April. The economy is grinding to a halt. Part of the problem is actually down to the distortion in Spain’s economy. It is highly geared towards tourism – and Europeans are not traveling as much. Why is it geared towards tourism? That was a key element of EU financial support over the past thirty years. Spain became Europe’s playground.
The tragedy for Spain is that in its regional economies – like Catalonia and the Basque country – a lot of the good work to lift its dependence on tourism will now come undone. Until recently these were vibrant economies.
Meanwhile people ask why the Spanish Prime Minister is reluctant to go for a bailout. With 50% youth unemployment, already in some areas, he’d be insane to invite the IMF in. But another reason is, he does have a card to play, German, French and Dutch banks are into Spain for over Euro 300 billion. They need an answer as much as he does.
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