Spanish banks may be forced to seek eurozone bailout

Post reply   Start new thread
:: New - Old :: Old - New

Pages: 1 |

Forum home :: Latest threads :: Search forums
The Comments
04 Apr 2012 00:00 by Keith110 Star rating in the UK and I am lead.... 682 posts Send private message

New Open Europe briefing: Spanish banks may be forced to seek eurozone bailout

03 Apr 2012

In a new briefing, Open Europe assesses the state of the Spanish economy in light of recent budget proposals, announced by the Spanish government in full today. Spain is not the “next Greece” - it remains a serious and diverse economy, with relatively good administration and infrastructure. However, the increasing exposure of its banks to potentially toxic loans, the difficulty in curbing Spanish regions' spending and the risk of reforms not taking effect quickly enough, all raise serious questions as to whether the Spanish economy will make it through without some sort of external help.

Open Europe’s Head of Economic Research Raoul Ruparel said,

“One in five loans to the real estate and construction sectors held by Spanish banks is now potentially toxic, a situation which could explode if house prices continue to drop. It’s not at all clear that the Spanish state could afford to recapitalise its banks in the case of severe losses, meaning that banks may be forced to tap the eurozone bailout fund instead, shifting even more of the risk onto European taxpayers.”

“The Spanish government deserves credit for the structural reforms that it has undertaken but further reforms are desperately needed, in particular on the labour market, if Spain wishes to have a sustainable future inside the eurozone.”

Key Points

- Given its size, the fate of the Spanish economy will also largely decide the fate of the euro. €80bn of €396bn (1/5) in loans that Spanish banks have made to the bust construction and real estate sectors are considered ‘doubtful’ and potentially toxic, meaning at serious risk of default, with the banks only holding €50bn in reserves to cover potential losses. Already dropping, house prices could potentially fall another 35%, meaning that Spanish banks will almost certainly face hefty losses as more households default on their mortgages.

- In such a scenario, the Spanish state is unlikely to be able to afford to recapitalise its banks, meaning that the eurozone’s permanent bailout fund (the ESM) would have to step in, shifting the cost to eurozone taxpayers.

- As domestic banks are currently the main buyers of Spanish government debt, this could also lead to major funding problems for Spain. The chances of a self-fulfilling bond run on Spanish debt would increase massively in this scenario, threatening to push the whole country into a full bailout.

- Containing spending in the Spanish regions is also key to Spain rebalancing its books. The level of unpaid debt on the balance sheets of local and regional governments has risen by €10bn (38%) since the start of the crisis (now topping €36bn). This will likely be paid off by the central government, increasing the country’s debt and deficit.

- Spain’s various reforms, particularly to the labour market, are welcome, but are themselves not enough to stop a bond run, as it will take time before they bite. The country’s long- term unemployment has now reached 9% of the economically active population, and youth unemployment reached 50.5% last month. This is threatening the long term productivity of the economy and whether Spanish society can sustain this level is unknown.

A Spanish bailout is far from a forgone conclusion, but more work needs to be done to avoid one. Open Europe recommends:

- Spanish banks double their provisions against souring loans and commit to thorough stress tests.

- Strengthen labour market reforms, particularly to relieve the welfare burden on state finances, including: end wage and pension indexation to inflation, reduce size and duration of benefits, limit collective bargaining, reduce redundancy costs and improve the business climate.

However, these reforms will only stand the test of time if they enjoy political buy-in across Spanish society and are seen as democratically legitimate, rather than being imposed from outside.

To read the report in full, please click here,


LEY 57/1968


Like 0      

Pages: 1 |

Post reply    Start new thread

Previous Threads

Motor insurance - 0 posts
eva - 0 posts
Hi Pat Powell - 2 posts
What happens to existing BG claims when a Bank is taken over - 2 posts
Car Tax - 9 posts
For Sale - 0 posts
Discounts on water charges - 4 posts
Can anyone advise me on commercial property in Seville? - 0 posts
How can I find suitable premises to start a school? - 0 posts
Directions - 2 posts
LOVE SPAIN - 0 posts
Foreign registered cars - Is there a crackdown going on? - 4 posts
Euribor versus IRPH - 4 posts
New ITV centre San Pedro - 5 posts
chiclana - 0 posts
Same old problem. - 5 posts
looking to buy a car and assistant - 1 posts
Public Speaking Conference in Marbella - 1 posts
If Spain did reintroduce the peseta... - 37 posts
Julie - 1 posts
Kyero???? Gone??? - 2 posts
The Sherrif of nottinham rides again - 9 posts
Warning against a scammer sending messages to members - 13 posts
Retirement in Spain - 0 posts

Number of posts in this thread: 1

DISCLAIMER:  All opinions posted on these message boards are the opinion solely of the poster and do not necessarily reflect the opinion of Eye on Spain, its servants or agents.

1 |
Our Weekly Email Digest

This site uses cookies. By continuing to browse you are agreeing to our use of cookies. More information here. x