The Spanish government has been struggling with its budget deficit for quite some time, but it now faces the biggest bailout of a bank ever.
A request from Bankia, one of the country’s biggest lenders, to inject 19 billion euros of survival money has put many questions on Spanish lips, among them: is Spain on the road that Greece has been travelling?
Bankia incurred a loss of three billion euros in 2011, contradicting earlier figures that showed it earned a modest profit. Already nationalised, its chairman Rodrigo Rato resigned earlier this month. He earned a salary of 2.4 million euros in 2011, the year in which his bank incurred the second biggest banking loss in Spanish history.
“Whilst many are focused on Greece and the upcoming elections there, it is possible that the pace of the events could be driven by the fate of banks in Spain, not politics in Greece,” said Olly Burrows, senior credit research analyst for Rabobank International.
“We believe that the Spanish government is past the point of being able to fix this problem on their own. Ultimately, we need a resolution to the sovereign debt crisis and the crisis in the Spanish banking sector.”
An academic criticised the Spanish government for doing very little on structural reforms and fiscal control. Juan Rubio-Ramirez, professor of economics at Duke University, also pointed out that government expenditure is larger this year compared to the previous year and that the “crisis is getting out of hand”.
“We need to solve our fiscal situation in addition to the banks,” he told euronews. “It is now clear we cannot pay for our welfare state. We need to reduce public servants wages, pensions, introduce co-payment in the health system, and increase prices paid by the public for services, education for example. We need to reform our unemployment benefits to incentivise people to go back to work. If we do not do that, there is some chance that sooner than later, we will become Greece.”
SHOULD I STAY OR SHOULD I GO?
The scope of the problem is wider than just one country. In Greece, conservatives have a lead in opinion polls. They are committed to keeping the country in the euro zone.
There is a basic element missing in the mix, however. “Eurozone partners need to put into action the missing piece of the puzzle: fiscal unity. Economic and Monetary Union (EMU) doesn’t work if you have the ‘M’ without the ‘E’. At present we have one monetary policy, and 17 fiscal policies,” Burrows told euronews.
“We are euro optimists. We believe that the euro will survive, but that the crisis must get worse before it gets better. Somewhat perversely, we view the current focus on the weakness of the Spanish banking sector as a potential boon: anything that speeds us to the brink of the crisis, and thus to a swift resolution, is to be welcomed.”