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Spain: Just the beginning

After bailout, Madrid will need more financial aid and Rome could be next.
Last modified: 11 Jun 2012 14:04
Photo: AFP

With a recession in Spain lasting until the end of 2014 at the very least, a banking bailout will push Madrid into asking for a sovereign bailout.

Its current bailout has no austerity string attached, more austerity would be a disaster for Europe’s fourth largest economy. (Portugal, Ireland and Greece must be looking at this and considering going back to the troika – IMF, EU, ECB - asking for more lenient terms.)

Citigroup expects the Spanish economy to contact 2.7 per cent this year, compared to official estimates of 1.7 per cent.

No growth means no tax receipts to repay debt and interest.

Is 100 billion euros ($125bn ) enough to save Spain’s banks? We’ll have to wait until June 18 the date for the independent assessment of Spain’s banking needs.

The banks have many problems but here’s just three:

Spanish banks have 300 billion euros in real estate exposure. More than half, 180 billion euro is considered to be toxic.

And the banks hold mortgage loans of more than 600 billion euros, with unemployment running at 24 per cent and a recession those loans will become troublesome.

Spanish banks are being forced to buy more and more government debt as international investors run for cover, it’s estimated that 60 per cent of Madrid’s debt is held by its banks.

Madrid needs to raise 82.5 billion euros by the end of the year, according to the Reuters news agency, with over-spending local authorities needing another 15.7 billion euros.

Presently the only way for Madrid to raise money is from its own banks. Thanks to bailout money printed by Germany, France and Italy and guaranteed by Berlin, Paris and Rome. Should the banks and Spain need more money Madrid’s partners are the only recourse. Should the banks fail or the government finally run out of money, Spain will need a full bailout; 350 billion euros according to JP Morgan Chase.

We’re in the perverse situation that Italy is being asked to guarantee debt of another nation. Italy with its own debt problems 120.1 per cent of GDP and in recession to boot. Prime Minister Mario Monti has done well in driving through reforms. According to Bloomberg, Italy needs to raise more than 35 billion euros a month to keep its finances ticking over.

The problem for Italy is that the financial markets haven’t got time to sit back and go through the nation’s economic record. Italy doesn’t have a high unemployment rate (compared to Spain), it’s banks haven’t lent money recklessly to property and construction companies.

But carrying a debt mountain of two trillion euros raises concerns.

The only way to save Italy is for the European Central Bank to print money.

Citigroup – which last November said Spain would need a bailout – believes Rome "will most likely require some form of intervention from the ECB, the EFSF/ESM (euro zone rescue funds) and the IMF at some point".

Contagion is an indiscriminate menace, being part of the Eurozone you are guilty by association.