Cookie consent

We use cookies to improve your experience on this website. By continuing to browse our site you agree to our use of cookies. Tell me more | Cookie preferences

Does Spain deserve its financial battering?

Bankia troubles put Spain on edge

    Just Watched

    Bankia troubles put Spain on edge

Bankia troubles put Spain on edge 01:55

Story highlights

  • Spain is making a valiant effort to meet the eurozone´s demands, says Gayle Allard
  • She says the bleak economic data hide some impressive successes
  • 'The chronic current-account deficit has fallen to half, and export growth is strong'
  • Allard: A Greek exit and contagion could shut off any hopes of economic stability.

The events of the past few weeks have made increasingly probable what was once considered impossible: Greece may exit the euro.

The country, which is in its fifth year of recession, has recently proved ungovernable and has a debt it can probably never repay despite bailouts, may find itself forced to default and reissue its own currency. The question now tormenting markets is -- will Spain follow the same path?

No one would argue that Spain is in good shape. Entering its second year of recession with unemployment soon to pass 25% and youth unemployment above 50%, Spain is making a valiant effort to meet the eurozone´s demands for fiscal austerity.

The surprise state intervention in Bankia, a huge Spanish savings bank heavily exposed to the overinflated property market, will put additional strain on the budget and has sent markets into a frenzy. Spain´s risk premium has soared five interest rate points above that of Germany, and there have been further downgrades by rating agencies.

All of this makes already tough deficit targets even more elusive, and in the short term chokes off any remaining hopes for growth and an exit from the downward economic spiral.

Gayle Allard of the IE Business School

But what outside analysts often ignore is that this bleak scenario hides some impressive successes. Spain entered the crisis with one of the lowest public debt figures in the eurozone and still has a smaller debt/GDP ratio than Germany despite its rapid rise.

Spain's conservative, diversified commercial banks have not yet needed a major bailout, and they have spent four years provisioning against the eventual collapse of real estate prices. The chronic current-account deficit has fallen by half, and export growth is strong. Unit labor costs have declined steadily for two years.

Spain last year handed a huge electoral win to a government that promised only austerity and unpopular reforms, hence voting for austerity rather than against it. In February, the government unveiled a reform of the rigid labor market which was the most radical in postwar Europe, and the only public response was a call for a general strike that met with a tepid response. Spain's indignados, who were actually the precursors of the Occupy movement, have continued a peaceful and dwindling protest over the crisis, without concrete proposals.

Bankia troubles put Spain on edge

    Just Watched

    Bankia troubles put Spain on edge

Bankia troubles put Spain on edge 01:55
PLAY VIDEO

There is still no violence in the streets, no calls to leave the euro or repudiate the debt, no government defiance of eurozone demands. It would be difficult to find a more model patient for the bitter medicine being administered by eurozone leaders.

So why are markets continuing to drive up Spain´s risk premium? Foreign analysts appear to toss Spain into the Greece "bag" for two reasons: either they overlook the still-acceptable public debt levels and claim it will veer out of control; or else they believe the banking system will need a huge bailout due to bad debts left over from the housing boom.

The first point is simply misinformation. The second assumes that the Bankia intervention was only the tip of the iceberg and that there is much more is to come. No one knows whether this will prove to be true, but the Spanish banking sector has been through European stress tests and its government is now striving to bring remaining toxic assets to immediate light once the situation has been evaluated by international management firms. If all the information is not in the public domain today, it soon will be.

What other economic dangers are there for Spain? The productive economy is still struggling to regain competitiveness. Declining labor costs and the labor market reform will help, but it will take time. It may be a year or more before the effects of the more flexible labor market will be felt. Private debt levels are higher than in much of Europe, and the country is in the throes of a slow, painful deleveraging process. Housing prices have only fallen by 27% after rising more than almost anywhere in Europe, and a further 30% decline may be needed, if the baseline is their long-run price/income ratio. This will continue to dampen consumption and detract from future growth.

The crisis in Spain will not end tomorrow. But the country does not deserve the battering it is taking on financial markets. Spaniards are proud to be in the euro, willing to sacrifice to meet the targets, embarrassed to even be considered bailout material.

With a better growth scenario or supportive markets, the Spanish could probably endure the crisis on their own. For a country that has taken the proverbial bull by the horns and followed eurozone rules, persistent market attack leaves it with only one hope -- immediate support from its eurozone partners.

Europe has been debating the issue of "support" in various guises for the peripheral countries -- that's Spain, Ireland, Portugal, Greece and Italy -- for many months. Massive intervention form the European Central Bank, Eurobonds, greater fiscal transfers and other proposals have been ruled out so far in favor of unbending fiscal austerity.

Europe´s swings between indecision and inflexibility have prolonged Greece´s agony and now threaten hopes of recovery in countries like Spain.

However, much of this discussion is losing relevance by the hour. The bottom line for Spain is no longer its economic indicators or its prospects for recovery, but rather the integrity of the euro. Delayed and insufficient responses by eurozone leaders have turned the crisis of Greece, which represents less than 2.5% of eurozone GDP, into a market storm that could engulf not only Spain and the rest of the periphery, but the world financial system.

The exit of one small country from the euro opens a fissure in the eurozone structure that makes contagion the only rule of the day. The outcome could be a banking and financial crisis of enormous dimensions and a new global recession.

Whether or not Spain is like Greece, a Greek exit and contagion could shut off any hopes of economic stability. Unless the eurozone´s leaders find a decisive, workable plan within the next few weeks or days, the crisis could bring down not only Greece, Spain and other peripheral countries, but also the European dream of unity.

      Europe's financial crisis

    • German Chancellor Angela Merkel talks with Finance Minister Wolfgang Schaeuble during a session at the Bundestag (lower house of parliament) on June 25, 2013 in Berlin.

      German Finance Minister Wolfgang Schaeuble says the eurozone's problems are not solved, but "we are in a much better shape than we used to be some years ago."
    • IBIZA, SPAIN - AUGUST 21:  A man dives into the sea in Cala Salada beach on August 21, 2013 in Ibiza, Spain. The small island of Ibiza lies within the Balearics islands, off the coast of Spain. For many years Ibiza has had a reputation as a party destination. Each year thousands of young people gather to enjoy not only the hot weather and the beaches but also the array of clubs with international DJ's playing to vast audiences. Ibiza has also gained a reputation for drugs and concerns are now growing that the taking and trafficking of drugs is spiralling out of control.  (Photo by David Ramos/Getty Images)

      Summer could not have come soon enough for Lloret de Mar, a tourist resort north of Barcelona. Despite the country's troubles, it's partying.
    • The Euro logo is seen in front of the European Central bank ECB prior to the press conference following the meeting of the Governing Council in Frankfurt/Main, Germany, on April 4, 2013.

      The global recovery has two speeds: That of the stimulus-fed U.S. and that of the austerity-starved eurozone, according to a new report.
    • The flags of the countries which make up the European Union, outside the European Parliament in Strasbourg, France.

      The "rich man's club" of Europe faces economic decay as it struggles to absorb Europe's "poor people", according to economic experts.
    • Packed beaches and Brit pubs? Not necessarily. Here's what drew travelers to one of Spain's most beautiful regions in the first place

      Spain's economic crisis is in its sixth straight year yet tourism, worth 11% of GDP, is holding its own, one of the few bright spots on a bleak horizon.
    • Photographer TTeixeira captured these images from a May Day protest in Porto, Portugal, Wednesday by demonstrators angered by economic austerity measures. "People protested with great order, but showed discontent against the government who they blame for this economic crisis," she said. "They want the government to resign and the Troika [European Commission, International Monetary Fund and European Central Bank] out of this country."

      As European financial markets close for the spring celebration of May Day, protesters across Europe and beyond have taken to the streets to demonstrate.
    • Croatian Prime Minister Zoran Milanovic delivers a speech in Mostar, on April 9, 2013. Prime Ministers from Bosnia's neighboring countries arrived in Bosnia with their delegations to attend the opening ceremony of "Mostar 2013 Trade Fair".

      As Croatia prepares to enter the 27-nation European Union, the country's Prime Minister says Italy must return to being the "powerhouse of Europe."
    • Anti-eviction activists and members of the Platform for Mortgage Victims (PAH) take part in a protest against the government's eviction laws in front of the Popular Party (PP) headquarters in Mallorca on April 23, 2013.

      Spain's unemployment rate rose to a record high of 27.2% in the first quarter of 2013, the Spanish National Institute of Statistics said Thursday.
    • People protest against the Spanish laws on house evictions outside the Spanish parliament on February 12, 2013 in Madrid, Spain.

      Spain has seen hundreds of protests since the "Indignados" movement erupted in 2011, marches and sit-ins are now common sights in the capital.