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Home > Blogs > Anthony Harrington > Spain on the rack: What price facts when hysteria rules?

Spain on the rack: What price facts when hysteria rules?

Finance Blogger: Anthony Harrington Anthony Harrington

The Spanish Government is getting seriously, but rather impotently, annoyed. With Spanish papers running stories saying that the Spanish Government is in secret talks with the EU, the IMF, and the US Treasury about a possible bailout, not immediately, but at some future date, and with this coming on top of a media and market frenzy over Irish and Portuguese debt, firefighting is becoming a full-time job for Spanish officials.

Spanish finance minister Elena Salgado has tried reason. She pointed out in an interview with Punto Radio, reported by the media, that there are no real parallels between Ireland’s situation and that of Spain. Ireland accounts for only around 1.7% of eurozone GDP; Spain is a vastly larger economy totalling 11.4% of the eurozone GDP. Ireland’s woes are being caused by its banking sector. Spanish banks, she insisted, are fine. Santander, for example, has a very substantial footprint in South America, as well as in Europe and the UK.

Also, Spain has made even bigger strides than Ireland in reducing its budget deficit. It achieved swinging cuts of over 47% in its budget deficit through the first 10 months of 2010, by comparison with the same period in 2009, thanks largely to a 2% rise in sales tax. It has gone on the rampage as far as benefits promises are concerned, pushing the retirement age back to 67 and all but two of the country’s 17 regional governments are said to be likely to exceed their deficit targets for 2010.

This being the case, Salgado was livid at a press briefing and rubbished reports in the Spanish newspaper, El Economista, which said it had inside information on the supposed Spanish bailout talks. According to reports of the meeting, she told journalists: “It has been denied by the Spanish Government, by the European Commission, and by the IMF. How much more can we deny it?”

However, the market has a reasonably good memory most of the time and it remembers the Spanish property crisis and its legacy of underpeforming loans sitting on bank books. In the current fevered environment where sovereign debt is playing the role of the ghost at the feast, concerns like these are not easily brushed aside. According to Bloomberg, the Deputy Governor of Spain’s Central Bank, Javier Ariztegui, gave a speech on November 25 in which he said Spanish banks would have to give more information on their exposure to property loans by March 2011.

The Spanish central bank is pushing for a spate of mergers in the savings-bank sector to ensure that weaker members are absorbed by larger groups. The end result could see a Spanish banking sector with only a third of today’s players. However, this “rump” would be healthy and well-funded, he said.

According to the Spanish central bank, the sector has some US$240 billion of “troubled exposure” to construction and real estate. Again though, this is thought to be manageable under most low-to-medium growth scenarios. For the market, however, the most salient feature is that if an Irish bailout is painful, and if following it up with another for Portugal would be worse, bailing out Spain would be right at the edge of Armageddon. It is big enough to require a bailout several times larger than the €85 billion for Ireland and while the ECB could always roll the printing presses to pay for it, that would be a lot more than the thin edge of the wedge for many observers.

Further reading on the sovereign debt crisis:

Tags: bailout , banking , deficit reduction , Elena Salgado , eurozone , Ireland , Portugal , property crash , sovereign debt , Spain
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    Fri Dec 03 09:02:34 GMT 2010

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