| Spanish economy succumbs to cycle of budget cuts; debt soars |
MADRID Spain seems trapped on a conveyor belt carrying it toward a furnace – an international rescue of the euro zone’s fourth biggest economy.
Bad commercial loans, economic decline and sliding real estate prices are all aggravating problems at Spain’s over-extended banks, which lent too much too freely during a credit fuelled property boom that lasted almost a decade.
Madrid’s euro zone partners are making available up to 100 billion euros to clean up the banks and, they hope, shield Spain from a debt crisis that has engulfed Greece, Ireland and Portugal and now threatens the single currency project itself. But grave risks remain as the economy succumbs to a cycle of budget cuts destroying economic growth, leading to more cuts. Many in the bond market don’t believe Spain can save itself – more evidence of that came on Thursday when Madrid’s 5-year borrowing costs hit a 15-year high above 6 per cent.
“Spain is getting too close to a point of no return when it comes to public debt,” said Alejandro Ruyra financial analyst with Kepler Research in Madrid.
Signs of the spending spree that began when Spain joined the euro on 1999 are everywhere – empty apartment blocks, unused airports, grandiose cultural centres and highways to nowhere. The house of cards collapsed in 2007-2008 leaving banks with 300 billion euros - equivalent to almost one third of annual economic output - of exposure to the property sector.
The banks, and Spain’s indebted regions have been economists’ main focus in trying to fix the Spanish problem. The International Monetary Fund’s worst-case scenario forecasts Spanish housing prices falling 20 per cent this year – they have already fallen as much as 30 per cent since 2007. A Reuters poll assuming no worsening in economic conditions – an optimistic scenario – sees prices dropping by 10 per cent.
The IMF says Spain’s financial system would need at least 40 billion euros to weather a serious economic storm and recommends a figure far in excess of that. In theory, the bank bailout agreed earlier this month should banish doubts over whether lenders can handle the fallout from economic recession. Added to that the property market is beginning to move finally as sellers start to cut the asking price for homes that on average are taking in excess of a year to sell.
But beyond the property market, the construction firms and other businesses most exposed to the price crash, there are other dangers. A detailed independent audit of the banks by four major global accounting firms – due by September – may show companies from other business sectors have also been pushed to the brink of default. Banks are already seeing rising mortgage defaults and bad loans in non-property sectors.
Time is also of the essence.
One banker who says the audit should find the banking system mostly sound still doubts it will come on time.
“What I’m not sure is whether it will be enough to recover market confidence, that it is not going to make things worse,” he said.
Prime Minister Mariano Rajoy is pressing for outside help rather than enacting convincing new measures at home.
Investors have steadily lost trust in Spain.
Moody’s credit rating agency downgraded Spanish sovereign bonds to just one notch above junk level, which means only investors with a high tolerance for risk will touch them. Tracking the bond market has become a national obsession. Public outrage is growing that every euro cut from spending on schools and hospital is going to pay higher financing costs on the national debt or to rescue banks.
Reuters
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