Vicky Pryce, author of Greekonomics: The Euro Crisis and Why Politicians Don't Get It, has been in Spain this week. From what she saw, it seems that the Greek election this Sunday should be our main cause of concern...
Little did I know when I arranged quite some time ago to visit Spain for my forthcoming book during the first few days of this week that the situation there would have become so explosive. As it happens I arrived just as the rescue plan for the Spanish banks had been announced. It had been touch and go and the details of the loan had still not been disclosed at that stage. But clearly, given that Spain is the 4th largest country in the eurozone, the Spanish government had no wish to be put in the same bracket as the other periphery countries – Ireland, Portugal and Greece – which had gone cap in hand to their partners in Europe and the IMF to get bail outs – without which they would not have been able to meet their debt obligations. So Spain held off until they managed to get a deal that was sold as being specifically for the banks that were in trouble because of the bad loans that accumulated during a long house building boom that went badly sour when the economy stopped growing and real estate prices collapsed. Arguably Spain should have done something earlier to clean up the banks or at least get a handle on the extent of the problem but the various stress tests done by the national authorities seemed to not reveal the full extent of the problems suffered by the specialist mortgage lenders.
The deal announced on Sunday, which made available up to E100b to Spain, allowed the government to claim that it was not a bail out of the standard sort as there were no fiscal conditions attached. However, that has not fooled the markets, despite some initial relief that at least a full scale banking crisis had been averted. It certainly had not fooled anyone I saw in Madrid, courtesy of two bright Spanish government economists who had very kindly arranged my visits. There is no doubt that the developing banking crisis in Spain, engulfing most though not all banks – the largest ones, like Santander and BBVA, are not expected to draw any money from the loan facility – had to be addressed as it was threatening to affect the banking sector all across Europe. But the bank re-capitalisation will happen through Spain’s own bank rescue fund and will be added to the Government debt. As the markets realized the implications of that – and in particular that the debt to GDP ratio would rise as a result from the 80% at present to nearer 90% depending on how much of the E100b was in the end needed – yields were pushed up again. And the measure of contagion that there already is in the system meant that attention then quickly also turned to Italy, even though on the surface that country is in a much better shape with a cleaner banking system and no housebuilding boom.
So what was achieved? Well, at least people’s savings are safer than they were at the end of last week. And despite the huge unemployment rate in Spain, the highest in Europe, Madrid in the lovely sunshine certainly gave the impression of a prosperous city in need of very little. And I am assured that the Spaniards have no wish to leave the Euro, which they see as having given them a lot of benefits in the past, and would be prepared to cede even more sovereignty if necessary to preserve their place in the EU and the Eurozone. So talk of a banking union, whatever that might mean in the end, which of course requires giving up also the right to an independent fiscal policy, does not seem to concern the man on the street – nor, I am told, the politicians. But how long will that last?
The reason it is argued that there were no additional conditions of the type others had to agree to is that Spain has already been implementing reforms and has been serious about cutting its deficit. But in reality those reforms were long overdue. Given that, the economy is likely to contract both this year and next the prospect of a proper bail out with strict conditions over the next few months cannot be excluded. And that could well prove to be a tipping point for the population, which has so far not protested anything like as much as other countries have done at the austerity measures, such as was seen in Greece. Indeed, most interesting for me, the one topic all my interlocutors were most concerned about, was the threat to the Euro from hard to predict elections in Greece this coming Sunday!
Vicky spoke to the Daily Mail about reactions to the Spanish bank rescue. Read what she had to say here. If you're a Greek speaker you can also check Vicky out on Greek TV station Antennae.