Spain’s borrowing costs hit record highs this week and European stock markets have slumped over fears Madrid can’t afford the price tag required to prop up its ailing banks. It’s looking ever more likely the country will need some kind of bailout.
After watching Greece from afar for years, many Spaniards now believe Spain’s number is up.
A tourist in Madrid might wonder where the crisis is. Traffic is heavy and the tapas bars are packed.
But listen in on some of the conversations, and it’s clear that Spaniards are scared.
“I saw the news of Ireland and Greece. I never thought it could happen here,” says Sergio Gonzales. “But during the last two weeks?”
Spain looks headed for a bailout, says Gonzales, a 27-year-old geologist who works for free, because he can’t find a job. He just withdrew his meager savings from Bankia, the failing lender that Spain is struggling to rescue.
“I have a box of coffee, with my money in it in my home. I think it’s better,” he says.
Sinking Deeper Into Debt
Spain’s economy has foundered for years, but major budget cuts didn’t hit until just a few months ago. Retail sales dropped nearly 10 percent in April, year-on-year.
Unemployment now tops 24 percent and is rising. Spain is paying ever-higher interest rates on the money it borrows because investors don’t trust they’ll get paid back. Madrid will have to pay $40 billion in interest payments this year alone.
And that, says economist Javier Diaz-Giménez, is money that’s not being spent on paying public employees, or for public health or education.
Diaz-Giménez of Spain’s IESE Business School says the country is under pressure from Brussels to cut spending. But bills keep popping up: A bank bailout here, higher interest payments there. And those interest payments can rise only so far.
“Eventually, it just becomes totally unmanageable, because you have to dedicate an ever-increasing share of your public revenues to paying financing costs,” he says.”
For Greece, Portugal and Ireland, the tipping point came when they had to pay 7 percent interest on 10-year bonds. Spain brushed 6.7 percent his week — dangerously close.
A glimmer of hope came Wednesday, though, when the European Commission recommended that Europe’s new emergency rescue fund be used to recapitalize banks.
The possibility that this rescue fund can lend directly to banks, says economist Rolf Campos, would help Spain a great deal.
Campos, also at IESE, says Spain has much lower government debt than Greece, Ireland or Portugal did just before their bailouts. The problem in Spain is the banks — weighed down by bad real estate loans — that threaten to topple the whole economy. If Europe helped rescue the banks, Spain might be OK.
Except for one thing, Campos says.
“It seems that Germany won’t accept this. So it’s wishful thinking,” he says.
Germany doesn’t want its contributions to the European rescue fund to disappear into Spanish banks that have had their share of mismanagement and scandal. This week, it came out that the parent company of Bankia has promised one of its executives a pension totaling $17.5 million — while taxpayers bail out his bank.
Even if Spanish leaders were to convince Germany to allow them to tap the European rescue fund, it could be months before cash starts flowing.
Back at the sidewalk cafe, Gonzales, the geologist who keeps his savings in a coffee can, isn’t sure what his future might bring.
“I’m thinking about going away to South America or some country like that,” he says with a sigh.
Like many young professionals forced to go abroad for work, Gonzales might not stick around to see if Spain collapses — or recovers.