Madrid - Spain seems trapped on a conveyor belt carrying it
towards a furnace - an international rescue of the eurozone’s fourth-biggest
Bad commercial loans, economic decline and sliding real
estate prices are all aggravating problems at Spain’s over-extended banks,
which lent too much too freely during a credit-fuelled property boom that
lasted almost a decade.
Madrid’s eurozone partners are making available up to €100bn
to clean up the banks and, they hope, shield Spain from a debt crisis that has
engulfed Greece, Ireland and Portugal and now threatens the single currency
But grave risks remain as the economy succumbs to a cycle of
budget cuts destroying economic growth, leading to more cuts.
Many in the bond
market don’t believe Spain can save itself - more evidence of that came on Thursday
when Madrid’s five-year borrowing costs hit a 15-year high above 6%.
“Spain is getting too close to a point of no return when it
comes to public debt,” said Alejandro Ruyra financial analyst with Kepler
Research in Madrid.
Signs of the spending spree that began when Spain joined the
euro in 1999 are everywhere - empty apartment blocks, unused airports,
grandiose cultural centres and highways to nowhere.
The house of cards
collapsed in 2007-2008 leaving banks with €300bn - equivalent to almost one-third
of annual economic output - of exposure to the property sector.
The banks, and Spain’s indebted regions, have been
economists’ main focus in trying to fix the Spanish problem.
The International Monetary Fund’s (IMF's) worst-case scenario
forecasts Spanish housing prices falling 20% this year - they have already
fallen as much as 30% since 2007.
Reuters poll assuming no worsening in economic conditions - an optimistic
scenario - sees prices dropping by 10%.
The IMF says Spain’s financial system would need at least
€40bn to weather a serious economic storm and recommends a figure far in excess
In theory, the bank bailout agreed earlier this month should
banish doubts over whether lenders can handle the fallout from economic
Added to that, the property market is beginning to move finally as
sellers start to cut the asking price for homes that on average are taking in
excess of a year to sell.
But beyond the property market, the construction firms and
other businesses most exposed to the price crash, there are other dangers.
detailed independent audit of the banks by four major global accounting firms -
due by September - may show companies from other business sectors have also
been pushed to the brink of default.
Banks are already seeing rising mortgage defaults and bad
loans in non-property sectors.
Time is also of the essence.
One banker who says the audit should find the banking system
mostly sound still doubts it will come on time.
“What I’m not sure is whether it will be enough to recover
market confidence, that it is not going to make things worse,” he said,
speaking on condition of anonymity because of the business sensitivity.
Centre-right Prime Minister Mariano Rajoy, who pledged to
restore investor confidence in Spain only to see the crisis deepen during six
months in office, is pressing for outside help rather than enacting convincing
new measures at home.
Investors have steadily lost trust in Spain.
Moody’s credit rating agency downgraded Spanish sovereign
bonds to just one notch above junk level, which means only investors with a
high tolerance for risk will touch them. Tracking the bond market has become a
Public outrage is growing that every euro cut from spending
on schools and hospital is going to pay higher financing costs on the national
debt or to rescue banks.
Unemployment is the highest in the European Union - 24.4%.
Banks have gone from lending too much to not lending at all, and families and
companies nervous about the future have stopped buying.
Economic activity risks
grinding to a halt.
New leader disappoints
After taking office in December Rajoy thought he would forge
an alliance with Germany’s Angela Merkel, a fellow conservative, and quickly
win back the confidence of financial markets with belt-tightening measures.
With his People’s Party’s enjoying an absolute majority in
parliament he easily passed an austere budget that slashed spending on
international aid and job training schemes, and introduced laws to make the
economy more competitive by reducing labour unions’ pay bargaining power, for
He also cracked down on Spain’s 17 autonomous regions, which
were meeting bond payments by delaying pay cheques for health workers and street
But Rajoy was undermined by his own limited experience on
the international stage. He tried too fast to win more leeway on deficit
cutting from European partners and soon got frustrated with Merkel’s perceived
His European strategy has now become a major risk for Spain.
Rajoy has clung to the argument that he has done enough and
it is now up to the European Central Bank (ECB) or the European bailout mechanisms to
step in with emergency action to bolster Spanish debt prices while his reforms
“How far does Europe have to go to the edge before the ECB
steps in?” asked one high-level Spanish official.
This game of chicken - basically a Spanish threat to take
the euro currency to the brink of disaster unless it gets aid with minimal
strings attached - will be hard to sustain.
European leaders are pushing Rajoy
to raise sales tax, further cut public sector wages and speed up plans to raise
the retirement age.
“Rajoy has lost too much credibility over the last few
months to just appeal for the ECB to intervene and for Europe to continue to
"He’s unrealistic if he thinks Europe is going to help him without
getting something in exchange and they’ve been unimpressed recently by what
he’s done here,” said David Bach, political analyst at IE business school in