Spain is worse off than Greece two years ago

(MoneyWatch) COMMENTARY Spain’s economy is in the worst shape of any European nation and it still has a lot of falling left to do. Its condition is at least as bad as Greece’s was two years ago when the debt crisis began. There is one critical difference between the two though, and it is not a good one. As Spanish Prime Minister Mariano Rajoy said Thursday: “It’s not possible to rescue Spain.”

The nation is in a recession, has an unemployment rate of 23 percent, and most of its banks could be cast as extras in “The Walking Dead.” That is basically what the head of Spain’s central bank said earlier this week. “If the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities,” Miguel Angel Fernandez Ordonez told a conference Tuesday. The most optimistic forecasts have the nation’s GDP shrinking about 1.7 percent this year.

Spain’s banks were crushed by the 2008 crash in real estate prices. As Gavyn Davies noted:


The downward correction in real house prices in the years after the construction bubble was fairly minor, at least by US standards. This has accelerated in recent months, and the renewed recession in 2012 is causing concern that the country’s largest banks, which the Bank of Spain has repeatedly said are in good shape, may after all, require further injections of new capital.


Where this new capital is supposed to come from is entirely unknown.

In addition to a lot of bad real estate debt, the banks now also hold a lot of bad Spanish government debt. Since December they have used cheap loans from the European Central Bank to become the primary buyers of Spanish bonds. Spain’s banks weren’t unique in this. All across the EU, banks with little capital have bought bonds from the very same debt-ridden nations which are supposed to stand behind those banks.

The reason the ECB loaned them the money to buy these bonds is that it was supposed to give them some good assets that might offset all the bad real estate assets. Instead it is has left them with holding bonds where the best case scenario is that they will be worth 70 percent less than face value.


CBS News has the full article

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