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Given the current status of its banking sector, Spain is unlikely to be able to afford to recapitalise its banks without requesting international assistance from its Eurozone counterparts and the IMF.
10 April 2012
€80 billion out of €396 billion (a fifth) in loans that Spanish banks have made to the bust construction and real estate sectors is considered ‘doubtful’ and potentially toxic, meaning it is at serious risk of default, with the banks only holding €50 billion in reserves to cover potential losses. House prices are already dropping, and could potentially fall another 35%. This means that Spanish banks will almost certainly face hefty losses, as more households default on their mortgages.
Given these premises, the Spanish state is unlikely to be able to afford to recapitalise its banks, meaning that the Eurozone’s permanent bailout fund (the European Stability Mechanism, ESM) would have to step in, shifting the cost to taxpayers. As domestic banks are currently the main buyers of Spanish government debt, this could also lead to major funding problems for Spain.
Containing spending in the Spanish regions is also vital, if Spain is to rebalance its books. The level of unpaid debt on the balance sheets of local and regional governments has risen by €10 billion (38%) since the start of the crisis – and is now topping €36 billion. This will likely be paid off by the central government, increasing Spanish debt and deficit.
Spain’s various reforms, particularly to the labour market, are welcome, but they will take time before they bite – and more needs to be done. 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 the Spanish society can sustain this level is unknown.
A Spanish bailout is is not yet a forgone conclusion, but more work needs to be done to avoid one. Open Europe recommends:
This type of reforms are more likely to stand the test of time if they enjoy political buy-in from across society in Spain, rather than being imposed from outside.
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