Spain moves to centre of eurozone crisis

Bankia ATM, Madrid There is no obvious mechanism to deal with the toxic debt pile in Spanish banks

In the few weeks before the Greeks return to the polls, Spain has taken Greece's place as the epicentre of the eurozone crisis.

Last night the crisis was discussed in a video-conference call between Angela Merkel, Mario Monti, Francois Hollande and Barack Obama. Investors are fleeing to safer havens, however low the return.

The particular problem is how the Spanish government intends to finance its fourth largest bank, Bankia. It was announced last week that 19bn euros (£15bn; $24bn) will have to be injected into the bank. This uncertainty has driven Spain's borrowing costs to 6.7%.

And beyond Bankia the extent of toxic real estate loans remaining hidden in other banks is still not clear. Estimates put the figure at around 180bn euros, but we won't know the true picture until auditors finish their investigation next month.

The dilemma was summed up by Francis Lun of Hong Kong-based Lyncean Holdings: "The Spanish banks are in trouble because of real estate loans. And the hole is so big that the Spanish government will find it difficult to save the Spanish banks without blowing a big hole in its budget."

And it's not just the hangover from the housing and construction bubble. Some regional governments are struggling to manage their debts and their overspending.

The former Spanish Prime Minister, Felipe Gonzalez, said "we're in a state of total emergency, the worst crisis we have ever lived through."

Grim scenario

The fear that Spain is trapped in a cycle of decline is evident in Brussels. Yesterday the EU's top economics official Olli Rehn offered Spain an extra year to cut its deficit to 3% if it came up with a convincing plan for its budget. Madrid said it did not need the extra time, sensitive about appearing to need outside help.

But the reality is grim. Unemployment, at 24%, is still rising. The country is in recession. The banks have a mountain of debt and real estate prices are still falling.

Spain insists that neither the government nor the banking sector needs a bailout, but elsewhere in Europe that is openly being discussed. And the question is where the funds will come from.

Spain is the eurozone's fourth largest economy. From 1 July the eurozone will have a permanent rescue fund, in the European Stability Mechanism. It can draw on 700bn euros. Even if that were enough to save Spain it could not help Italy, which is being buffeted by the Spanish crisis. Its borrowing costs have gone above 6%.

It potentially raises the question that has hovered over the eurozone for two years. What actually stands behind the single currency? Where is the lender of last resort?

Deputy Prime Minister Soraya Saenz de Santamaria defined it as being nothing less than about the future of Europe. "If the EU doesn't reinforce the eurozone with some sort of mechanism, it's not about who leaves, it's about the EU itself. What is Europe without the euro?"

That will once again put more pressure on Germany, the EU's strongest economy, for if Spain cannot solve its funding problems it will look for a European solution.

Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • Comment number 206.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 205.

    202 quiet

    Who to blame instead of Germany list:

    France...coming soon
    Italy...coming soon

    Did Nik hijack your account?

  • rate this

    Comment number 204.

    202. quietoaktree said:
    "The Greeks, Spaniards and Irish are getting their ´comeuppance´ --guess who´s next in line."

    So every carpenter, waitress, bank clerk, nurse, fireman, gardener ...etc... is going to get their "comeuppance"?

    Have you been watching Fox News or do you just work for Murdoch?

    Think before you write such meaningless drivel.

  • rate this

    Comment number 203.

    199. sjov quotes capitalism as:
    ".. in which a country’s trade and industry are controlled by private owners for profit ..."

    Oxford's definition is missing one word - "corporate"

    should read: ".. controlled by corporations or private owners for profit .."

    I'm sure Margaret Howard was referring to corporate capitalism where international corporations wield undeserved & corruptive power.

  • rate this

    Comment number 202.

    #201 WhyMe44

    The Greeks, Spaniards and Irish are getting their ´comeuppance´ --guess who´s next in line.

  • rate this

    Comment number 201.

    Whilst enjoying the Jubilee, spare a thought for financially distressed families in Greece, Spain & Ireland suffering thanks to the greed of investment bankers.

    Then reflect on corporate greed & globalisation that creates wage differentials beyond belief.

    Not only bankers, but footballers & CEOs claiming they're indispensable.

    Rooney earns £13m pa, £35,600 each day!
    (Thanks to Sky TV)

  • rate this

    Comment number 200.

    #197 Bangers

    Now we are discussing --

    Hatched, Matched and Dispatched ?

    --what did the slab cost?

    -- wouldn´t being fertilizer have been cheaper ?

  • rate this

    Comment number 199.

    198.margaret howard; [Accessed 1st June 2012]
    an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.
    Looks like your 'wrong' once again Margaret?. 'Bangers' slab layer would have given a price including a profit, of that I am 100% certain!

  • rate this

    Comment number 198.

    197 bangers
    "the price for having a slab laid in my garden."
    That's not capitalism but supply and demand.
    Capitalism is greedy banksters making huge profits out of our hard labour and savings and involving us in Ponzi schemes and other pyramid scams.
    According to Max Keiser on Russia Today, the latest swindle is cornering the silver market and manipulating food prices. Watch out.

  • rate this

    Comment number 197.

    @191 margaret howard

    So capitalism is dead? Funny that because I experienced it myself this afternoon in the pub when I negotiated the price for having a concrete slab laid in may back garden..
    Capitalism is alive and well, it exists wherever human beings gather.

  • rate this

    Comment number 196.

    yawn.. the pointless ramblings have begun. Anyway back on topic-

    with almost a quarter of its population out of work together with the self-defeating austerity cuts, it's no small wonder Spain is in a spiral of decline. All its leaders can do is repeat what we've heard before from Greece, Ireland, Portugal.. "we don't need bailout", but in the end they'll take the 700b before they suck Italy in

  • rate this

    Comment number 195.

    169 powermeer

    "I wonder whether anybody in Brussels finally admits now that EZ's problems are SYSTEMIC in nature."
    Seems to be catching:

    "Stock markets have fallen following worse-than-expected US jobs figures" (BBC now)
    I know you like those figures.

  • rate this

    Comment number 194.

    Why doesn´t Gavin read the BBC--or at least ask the experts on Spain before spouting.

    "It potentially raises the question that has hovered over the eurozone for two years. What actually stands behind the single currency? Where is the lender of last resort?"

    -Biased and 1/2 reporting is getting on even more of my nerves !

    -why not the whole truth?

  • rate this

    Comment number 193.

    178 Eddy
    "I can only assume you mean AM (Merkel) is a leftie, and the EU a union of soviets."
    To any American of the Republican persuasion, Obama is a lefty.
    And now they add religion to the brew!
    The would be pres Romney said this week Jesus visited America 2000 years ago where the New Jerusalem will be built!
    The nutters will take over the madhouse. That's the real worry.

  • rate this

    Comment number 192.


    " do you explain that the EU must protect its...citizens from inadvertently buying a banana with the wrong curvature by making selling it illegal?.."


    It isn't illegal at all. Only to sell it as rated at "AAA". If only the US were as diligent with its mortgages...

  • rate this

    Comment number 191.

    172 Homer
    Haven't you read 166 stoneyfarmer?


  • rate this

    Comment number 190.

    Democracy is to blame for the financial mess country's find themselves in.

    We vote politicians in who represent us and share our values.

    The majority of voters are in debt or some description (credit cards, car loans, mortgages) except for the Germans.

    Governments are simply a reflection of the democratic society they represent.

    Woe betide the politician who misrepresents his/her society.

  • rate this

    Comment number 189.

    Different regions have different spleens:

  • rate this

    Comment number 188.

    185. Kit Green
    'a free trade area with common trading standards. What is wrong with that?''


    This is a ''Free'' (as-if) Trade Area that has been placed to enforce the financial interests of the north region between W.Germany and northern France forbidding the periphery of taking own decisions (eg. Greece constructing ports and gas pipelines, Spain to import from L.America etc.).

  • rate this

    Comment number 187.

    184 Suilerua
    Another communist rule during the olympics no cards other than the sponsors Visa will be usable at nearby machines, but then to you only communist can act in a stupid way,therefore in your world all bankers must be communist ,


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