Spain in eurozone crisis crosshairs
June 9, 2012 -- Updated 1051 GMT (1851 HKT)
CNN) -- Spain, a eurozone behemoth, is in the crosshairs of Europe's financial crisis. The country is suffering from soaring borrowing costs, a banking system leaking cash and unemployment rates at devastating levels.
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.
What can Spain do to beat debt crisis?
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."
Spain: Too big to fail, too big to bail
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.
CNNMoney's Aaron Smith, Alfred Souza and Ben Rooney, and CNN's Al Goodman and Tim Lister contributed to this report.
'Spanic,' 'Grexit' and Europe's flying money
June 6, 2012 -- Updated 0024 GMT (0824 HKT)
CNN) -- Will the future of the eurozone be decided
at thousands of ATMs across the continent? That may be a stretch, but
Spaniards and Greeks are withdrawing billions of euros from their bank
accounts and sending them somewhere "safer."
And they're getting some encouragement, too.
Deutsche Bank, for example, is soliciting the money of Spaniards nervous about the solvency of banks at home. Such nervousness is understandable, as the Spanish government struggles to inject liquidity into the country's fourth-largest bank -- Bankia -- and other financial institutions weighed down by bad property loans.
Finance Minister
Cristobal Montoro admitted on Spanish radio Tuesday that the state has
"a problem with access to the (debt) markets."
Spanish officials say €50
billion (about $62 billion) may be required to keep the country's banks
afloat. Analysts at investment bank UBS believe the figure may be
closer to €120 billion.
Earlier this week, the
Bank of Spain disclosed that the net outflow of capital in March was a
record €66.2 billion, twice as much as the previous peak in December.
Data from the European Central Bank shows that in April deposits of
individuals and companies held at Spanish banks fell by €31.5 billion
($39 billion), though it's unclear how much of that money may have gone
abroad.
On one day in May, Greeks withdrew an estimated €700 million euros from local banks -- scared that a "Grexit" (the now familiar shorthand for a disorderly Greek withdrawal from the eurozone) would destroy their savings.
The contagion has now
spread to Cyprus, whose banks have made about €23 billion in loans to
Greek individuals and companies. Last week, Cypriot President Demetris
Christofias pointedly would not rule out the need for European support
in rescuing banks with high exposure to Greece.
Cyprus is the third
smallest economy in the eurozone. Spain is the fourth largest. And given
the brinkmanship between Spain's government and the European Union over
how to rescue that country's banks, Spaniards may well send more of
their money to safe havens. (This is now becoming known as "Spanic.")
Spain wants cash at low
interest rates from the European Central Bank, or ECB, pumped directly
into its banks, because its own borrowing costs are so much higher --
the yield on its 10-year bond was 6.4% Tuesday. Speaking to the Spanish
Senate Tuesday, Prime Minister Mariano Rajoy for the first time called
publicly for the creation of eurobonds.
That puts him at odds
with German Chancellor Angela Merkel and the ECB. Put crudely, eurobonds
would dilute Germany's fiscal strength in a pool of junk debt.
The ECB governor, Mario
Draghi, has indirectly accused Spain of underestimating the importance
of its banking problem. In the words of one financial analyst, it's like
two cars racing toward each other on a single-track road. Someone's
nerve has to give.
The ECB has already
plowed more than €1 trillion into the European banking system since
December in an effort to stimulate liquidity. That injection also helped
lower Italian and Spanish sovereign bond yields, as banks used some of
the cash to snap up government debt.
Expect the European
Stability Mechanism, which debuts next month armed with €500 billion, to
have plenty of suitors, even though it won't be allowed to lend
directly to banks.
A series of summits
There was not much clue
about the way forward after a conference call early Tuesday among the
finance ministers and central bank governors of the G-7, which includes
the United States, Germany, Japan and Britain.
A terse statement issued
afterward said: "The G-7 Ministers and Governors reviewed developments
in the global economy and financial markets and the policy response
under consideration, including the progress towards financial and fiscal
union in Europe."
Next stop is the G-20
summit in Los Cabos, Mexico. It would be an unwieldy format for making a
bold statement of intent on the eurozone -- especially as the meeting
comes the day after the next Greek election.
Perhaps more important
to the future of the single currency will be the European Union summit
at the end of the month, June 28-29. Draghi wants a Europe-wide "banking
union" that would have powers akin to the Federal Deposit Insurance
Corporation in the United States and would deter a run on the most
vulnerable banks in southern Europe.
Speaking to Reuters
during a conference in Latvia, the International Monetary Fund's
Christine Lagarde said Tuesday: "The master plan that everybody signs up
to will be important because it will set a vision, it will set a
collective determination. And that is lacking at the moment."
Analysts say such a
"master plan" would need to correct the eurozone's schizophrenic
structure: a single currency without a common fiscal policy or
Europe-wide bond market.
Austan Goolsbee, former
chairman of the Council of Economic Advisers in the Obama
administration, summed up the root problem in a Wall Street Journal
article last week, saying, "The eurozone problem remains the locking
together of very different economies into a monetary union without a way
to adjust."
He added, "Normally,
exchange-rate adjustments would reduce this gap. ... But without an
exchange-rate safety valve you need an alternate way to rebalance
economies."
For Germany, whose
approval is needed for any initiative to protect European banks, there
is at least a silver lining in the current crisis. As investors flee to
safety, Germany's two-year bond pays effectively zero percent. In other
words, it's borrowing for free, quite possibly with the help of anxious
Spaniards.
At least Europeans have
the Euro 2012 football tournament to distract them for the rest of this
month, starting Friday. In the last tournament -- in 2008 -- Spain
defeated Germany in the final.
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