Spain in eurozone crisis crosshairs

Spanish miners burn tires during an anti-austerity demonstration in Vega del Rey, near Oviedo, in northern Spain on June 4, 2012.

STORY HIGHLIGHTS

  • Spain, a eurozone behemoth, is in the crosshairs of Europe’s financial crisis
  • The country faces soaring borrowing costs, a banking system in disarray and high unemployment rates
  • If such a major economy were to fail, the repercussions could cause unprecedented havoc across the globe
  • But the situation in Spain is developing like a “perfect storm,” with money being pulled out of the country

(CNN) — Spain, a eurozone behemoth, is in the crosshairs of Europe’s financial crisis. The country is suffering from soaring borrowing costs, a banking system leaking cash and unemployment rates at devastating levels.

Greece might be teetering toward expulsion from the eurozone but Spain’s situation is now the focus of concern. If such a major economy were to fail, the repercussions could cause unprecedented havoc across Europe — and the globe.

Just how bad is the pain in Spain?

This week Spain’s treasury minister Cristobal Montoro bluntly admitted it was “technically impossible” for Spain to bail itself out, and that the country needed help to access funds.

The country is facing a credit freeze after its financial problems were thrown into sharp relief by the bailout of Bankia, the country’s fourth-largest bank.

Bankia last month called for €19 billion ($23.7 billion) of assistance, panicking markets. It sent Spain’s cost of borrowing (for the sovereign ten-year bond) toward 7% — a level which is regarded as unsustainable and has precipitated bailouts of other euro countries.

Spain’s former Prime Minister Felipe Gonzalez last week warned the country is in a state of “total emergency” and that the crisis is proving to be the “worst we have ever lived through.”

But Spain -- in its second recession since 2009 – has been dubbed “too big to bail, too big to fail.”

The Spanish economy is the eurozone’s fourth-largest — after Germany, France and Italy — making up around 11% of the bloc’s GDP.

To put that in perspective, Greece, Portugal and Ireland — the three eurozone countries which have already been bailed out — combined make up less than 6% of the bloc’s economy.

How did Spain reach this point?

Spain’s banking sector is facing up to years of bad investments, largely in real estate, which was buoyed by cheap credit and the country’s sunny climate.

Its housing boom-times of 2002 to 2008 were fed, in part, by retired north Europeans buying up second houses in places such as Valencia and Murcia, according to political scientist Julio Embid, of think-tank Fundación Alternativas.

Families also bought up expensive houses with long mortgages during this time, he said. When the economy collapsed in 2008, people lost their jobs — and with them their homes.

Real estate prices have now fallen some 30% to 50% from their highs, leaving Spain’s banks, or cajas with housing stock on their books whose current value is much lower than the original.

Meanwhile hundreds of thousands of houses built during the boom remain unsold, and people wanting to buy may find it difficult to get credit.

Embid also points to the cajas’ politically-driven executive appointments as a contributing factor to the crisis. “Many senior bankers were low-profile regional politicians or majors, without any financial experience or bank background,” he said.

What other headaches does Spain face?

In addition to the financial sector’s problems, Spain could be liable for the debts of several regional governments, which have been hit with ratings downgrades.

Spain also has an unemployment crisis, with more than half those under 24 out of work, and almost one in four people overall. Spain’s jobless rate has helped pushed the eurozone’s total unemployment rate to 11% — its highest since the eurozone was created in 1999.

The IMF is now in the country for its annual economic review, with the mission expected to last until the middle of the month.

 

CNN has the full article

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