Spain on Edge as Focus Shifts from Banks to State’s Finances

As Spanish antiausterity protesters take to the streets, financial markets switch focus from the nation's messed-up banks to the wobbly state of its finances

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Lluis Gene / AFP / Getty Images

A man holds a doll depicting Spain's Prime Minister Mariano Rajoy with a placard reading "Mariano had a problem with the scissors" during a demonstration organized by unions in Barcelona on June 20, 2012

Spain got the green light from its E.U. partners last Friday for a $120 billion bailout of its troubled banks. The approval came in record time for the beleaguered euro zone, less than a month after Prime Minister Mariano Rajoy made a formal request for funds on June 25. The reaction of financial markets? A rout on the Madrid stock exchange and a big jump in the yields on Spanish government bonds, which soared to over 7%, a crisis level that is unsustainable.

What’s going on? The short answer is that the markets are switching their attention from the parlous state of Spanish banks, which have $192 billion in what the Bank of Spain calls “doubtful loans” on their books, or almost 9% of total lending, and are now focusing on the state’s finances, which are showing new signs of deterioration. That’s a worrying development for the euro zone as a whole, since the emergency bailout funds it has agreed on would barely cover a Greek-like sovereign rescue of an economy as big as Spain’s. The International Monetary Fund, in a new report on the euro zone issued on Friday, warns about “very high levels of stress” and is calling for “more determined action” to root out the causes of the crisis.

(MORE: Austerity Bites: How the Remedy May Just Make Things Worse for Spain)

But it’s hard to see how much more Rajoy’s government in Madrid can do by way of determined action. The government this month announced further massive budget cuts totaling $80 billion that will hit key sectors, including education and spending on public investment as well as unemployment benefits, in an effort to bring the budget deficit down to 3% of gross domestic product by 2014. This year, the deficit was supposed to drop to 4.8%, but Spain’s European partners earlier in the month gave it a little breathing space, allowing it to run a deficit of over 6%.

The cuts have sparked big street protests that continued over the weekend, raising the political pressure on Rajoy. Unemployment is over 20%, and morale is rock bottom; more than 40,000 Spaniards have left the country in the first six months of this year, according to the National Statistics Institute, up 44% from last year, and there is little sign of relief anytime soon: the Bank of Spain’s governor, Luis M. Linde, said last week that he now expects the economy to contract by 1.5% this year overall and only show very weak growth in 2013.

(PHOTOS: Spanish Miners Protest Spending Cuts)

Adding to its problems, the government faces some worrying new financial pressures from heavily indebted Spanish regional governments that are looking to Madrid for a bailout. The 17 autonomous regions are not able to tap international debt markets and so depend on money from central government, which has created a $22 billion emergency fund. But that may not be enough: on Friday, the Valencia region — which has been among the hardest hit after a lengthy debt-financed spending spree on real estate — said it needed to tap that fund, and other regions including Catalonia, Castilla La Mancha and Andalucia are expected to follow suit.

“The markets are doubting Spain,” Germany’s Finance Minister, Wolfgang Schäuble, told the Bundestag last week, before it voted overwhelmingly to back the Spanish bank-rescue package. He warned that even the appearance that Spain might have difficulty honoring its debt would have a very severe impact on the rest of the euro zone. So what happens next? It’s late July, the Olympics are coming, and Europeans, at least, are heading off to vacation. Spain — and its European partners — are hoping the markets will quiet down. A first tranche of the $120 billion bank-rescue money will be arriving in Spain later this month, which could help. But what’s sure is that every small piece of bad news out of Spain will set off fresh jitters. The fiesta is definitely over.

MORE: Why Spain’s Big Bank Bailout Is Really a Big Bust

14 comments
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induscharwak
induscharwak

Socialism bound to halt because it has limit but evolutionary capitalism bound to run. No body is ready to experiment?

www.dai1ynews.blogspot.com
www.dai1ynews.blogspot.com

The market is saying the "doubtful loans" that the Bank of Spain says Spanish banks hold are not just bad real estate loans, but also should include their substantial holdings of Spanish government bonds.  Moreover, the EU bailout funds are not gifts, correct?  Don't they have to be repaid with interest?By the way My friend gets more than $2500/Month  working few hours on his personal computer , to Read D Article (copy the link on my profile name)

Danyz
Danyz

I think here of a peculiar type of cruise ship. On the sunny decks you have lots of well off American and Western European retirees with staff bringing them drinks and snacks as they bask their pudgy bodies in the sun. Part of their ticket price though goes to feed and maintain the galley slaves below who are propelling the ungainly craft forward. But the vacationers are grumbling. The ship is behind schedule and they will  be one day late for their next port of call, with it's fabulous casinos and entertainment. They get together and order the captain to reduce rations for those lazy good for nothings below. Oh, but then, the tired and hungry rowers now perform even less well. The complaining vacationers order even more cuts in rations. This process continues for several days until the ship is dead in the water and hundreds of miles from its resort destination. Now the vacationers are running out of food and drinks as waves begin to swell menacingly high. "Um," one of them ventures to say at this point, "Do you think their might be something wrong with our system?"

Firozali A.Mulla
Firozali A.Mulla

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Guest
Guest

The dominos are falling kids. When will we follow  ???  You know its coming. Won't be no Chicom checks this time.

Leannatj
Leannatj

like  Martin answered I'm dazzled that any one can make $4528 in 4 weeks on the computer. have you look this(Click on menu Home)

Firozali A.Mulla
Firozali A.Mulla

We learn in the

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Egger Spindatwheel
Egger Spindatwheel

The market is saying the "doubtful loans" that the Bank of Spain says Spanish banks hold are not just bad real estate loans, but also should include their substantial holdings of Spanish government bonds.  Moreover, the EU bailout funds are not gifts, correct?  Don't they have to be repaid with interest?

Timelord
Timelord

No they are not gifts.

Besides the banks even get a negative interest value from the ECB.

Alas , the Euro as a currency has the value of a Mickey Mouse Dollar.

You want proof  of this ?

Where has the REAL backup in Gold Bullion of each EU country gone ?

Exactly, it disappeared.

DebbieSmith1956
DebbieSmith1956

Here is an article that looks at the very wide range of yields on Europe's sovereign debt and how the flight to safe havens has, for the first time, pushed yields on some country's debt into negative territory:

http://viableopposition.blogsp...

Timelord
Timelord

Ohh.. now we have to separate the banks from the Spanish Government ?

Wasn't it their government who approved all these risks ?

There is no bailout .

Nor for their banks, nor for their government.

As Thou not wishes that happens to Thee, Thou should not have done to others.

Roberto
Roberto

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