As unemployment soars, financial institutions face rising bad debt and the need for a European Union rescue.
Spain is in a crisis “of huge proportions”, Foreign Minister Jose Manuel Garcia-Margallo has warned after the latest official figures showed unemployment at almost 25% amid concern that the country’s banking sector might need a crippling €120-billion bailout before the end of the year.
The jobless rate stood at an 18-year high after the latest figures showed it at 24.4%, or 5.6-million people out of work. Unemployment is now the focus of debate in the country as policymakers worry about the effects of a collapse in consumer spending, a drop in tax receipts and spiralling bad debt.
Standard & Poor’s, the ratings agency that downgraded Spain’s credit status on April 26, said it was concerned that the situation was worsening and rising defaults on loans and mortgages could quickly undermine the banking sector.
Critics of the right-wing administration headed by Prime Minister Mariano Rajoy said government policies were partly to blame for making the situation worse. The unemployment rate has soared on the back of labour reforms that make it easier and cheaper to sack people. About 374 300 jobs were lost in the first three months of this year, representing an estimated loss of €953-million in income tax receipts.
No positive indicators
An austerity budget passed last month, which pushed up education and health charges while cutting benefit payouts, is also blamed for undermining household income and prolonging the recession. Recently, Economy Minister Luis de Guindos said indirect taxes would have to rise next year to raise a further €8-billion.
In four of the country’s autonomous regions, the jobless rate is more than 30% and across the country 52% of under-25s are out of work, leaving 1.72-million households without a single member with work.
Engracia Hidalgo, the employment minister, said there were “no positive indicators”, whereas Garcia-Margallo described the figures as “terrible for everyone and terrible for the government”. Of Spain’s 47-million inhabitants, only 17 433200 have employment.
In a radio interview, Garcia-Margallo urged the European Union to do more to promote growth. “What’s bad for us is bad for them,” he said. “It’s like the Titanic – if it sinks, the first-class passengers [also] go down with it.” He defended government reforms, saying there was no alternative. “When you take strong measures to treat a sick person, at first they become weaker, but if you don’t apply this treatment, they won’t get better.” However, austerity alone was not enough, he said.
Spanish banks have long been suspected of disguising billions of euros of bad debt on their books after a property price collapse wiped more than 60% off the value of homes in some areas. Many families have maintained mortgage payments during the crisis, but a steep rise in unemployment has sent the number of bad loans soaring.
The government is considering whether to create a holding company for the banks’ toxic real-estate assets after three rounds of forced clean-ups and consolidation in the financial sector failed to draw a line under the problem.
Standard & Poor’s, which downgraded the country’s rating from A to BBB+, said: “It is not going to be an easy job for most Spanish banks to find funding in the market. The state may be called for at some point. But that, for now at least, is something the Spanish government seems to be unwilling to contemplate.”
The chaotic situation caused further falls on the stock exchange in Madrid and interest rates on 10-year sovereign bonds touched 6%.
Standard & Poor’s expects the Spanish economy to shrink by 1.5% this year and 0.5% in 2013. The agency does not expect the creation of new jobs before 2015.
Effects of the labour market
Fernando Jimenez Latorre, the secretary of state for the economy, said he did not expect unemployment to rise above 25% this year. He complained that the ratings agency had not taken into account all the adjustments the government had made, such as capping the budgets of the regional governments. Its analysis was “short term”, he said.
Alfredo Pastor, an economist at the IESE Business School in Madrid, said: “In the big numbers we are not going to see the effects of the labour market reform before 2013. In fact, Spain needs deeper reforms that are effective and productivity-enhancing. The government needs to take other measures, such as helping credit flow to business, to help create jobs.”
In his blog for the financial daily Expansion, independent stock exchange analyst Ismael de la Cruz said: “How much longer can this state of affairs last? Not much. We can’t discount the likelihood that the Spanish banking sector will need external help from Europe before the end of the year. The problem is that Spain is not capable of doing this with its own resources and it’s hard to find foreign investors who are prepared to take the risk, which leaves no option but a European rescue fund.” – © Guardian News & Media 2012