Spain faces up to unpleasant economic realities, says David Mathieson

The celebratory soccer binge over, Spaniards are once again having to face up to some unpleasant economic realities and along with the rest of Europe Spain has just published the results of a stress test on its banking system.   A report on financial services would not normally be the stuff of conversation in the bars of Madrid but most people are aware that the consequences could be serious.   Apprehension has again replaced euphoria.  For Prime Minister Zapatero the findings will have far reaching political consequences: confidence in his socialist (PSOE) Government is at a record low and the revealed weaknesses in parts of the Spanish financial system will not improve the national mood.  So far, Spain has avoided a Greek style meltdown but renewed trust in the Spanish banking system is essential if Madrid is not to become the new Athens.

Up to now debate on the crisis in Spain has focussed on the state of the public finances and the growing fiscal deficit – the difference between the Government’s income and spending – which is now around 11.5% of annual income.   Over the last couple of years unemployment has soared to 20% – the fastest increase in Europe – and nearly two million people have stopped contributing to the social security system.  Consumption and investment have slowed (trade between the UK and Spain, for example, fell by more than 30% last year) and Government revenues have collapsed. 

But Government borrowing is dwarfed by the private debt held by individuals and firms.  The housing boom forced people to take out ever bigger mortgages.  Like the British, Spaniards fell in love with credit cards and cheerfully signed almost any dotted line to extend their borrowing.  Low interest rates (viva the benefits of Euro membership!) encouraged companies to undertake ever more audacious and leveraged expansion.  Now, however, the fiesta is truly over.  Bank lending took place to acquire assets – but it is entirely unclear what value many of those assets now have.  Take housing and construction for example, which provided the basis for much Spanish growth over the past decade.  Spain is littered unfinished building projects, frozen in time.  At least a million new houses are unsold and their market value is unknown because there is no market.

The repossession of homes and liquidation of companies means that the banks have now unwillingly acquired many of the possibly worthless assets which they lent against.   The 40 or so regional savings banks or cajas (akin to the old British building societies) are particularly exposed and are rapidly being merged in an attempt to shore up their balance sheets.  The stress test reveals that some of these institutions are perilously close to bust so that the Government will be forced to step in and recapitalise them.

The political consequences are obvious.  Saving the cajas will put further pressure on public finances and add to Zapatero’s woes.  As an Argentinean friend commented, success on the soccer pitch is great – but it doesn’t fix the economy.   

David Mathieson is a Madrid based journalist.

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