Economic experts watching Spain don’t know how much money will be needed or precisely when, but some are near certain that Madrid will eventually seek a multibillion-euro bailout for its banks, and perhaps even for the state itself.
Prime Minister Mariano Rajoy has repeatedly said that Spain doesn’t need or want an international bailout, and the European Union, which along with the International Monetary Fund has already rescued Greece, Ireland and Portugal, also dismisses such talk.
But economists believe that Spanish banks will have to turn to the euro zone’s rescue fund, the European Financial Stability Facility (EFSF), for help in covering losses caused by a property market crash that has yet to end.
Likewise, investors are fretting about how Mr. Rajoy’s centre-right government can enforce deep austerity while reviving a recession-bound economy at the same time.
“They’re going to need EFSF money to recapitalize the banking sector,” said Carsten Brzeski, a senior economist at ING in Brussels. “I think we’ll only see a real end to the Spanish misery if the real estate market stabilizes.”
Madrid is likely to hold out for some time. “The underlying picture in Spain is dramatic, but is it dramatic in the way that it needs a bailout package tomorrow? No,” Mr. Brzeski said. “But if you look ahead, let’s say the next six months, I would not be surprised if they [the banks]have to get some kind of European support.”
Market concerns about the euro zone’s fourth-largest economy have deepened in the past week. Yields on the government’s 10-year bonds, which reflect the risk investors attach to owning Spanish debt, have risen above 6 per cent, a level that has proved a trigger point for other troubled euro zone countries.
At the moment, the EU is backing Madrid. Jean-Claude Juncker, who chairs the committee of euro zone finance ministers, said Spain is taking the necessary steps to get its economy back on track, despite a recession and unemployment at 24 per cent.
“I don’t think Spain will need any kind of external support,” Mr. Juncker said. “I would like to invite financial markets to behave in a rational way. Spain is on track.”
German Finance Minister Wolfgang Schaeuble also rejected comparisons with countries that are already on bailout programs. “The fundamental data in Spain are not comparable to those in the countries that are under a program,” he said. “Spain needs to work to win confidence, however, if the positive developments are to continue.”
Markets took fright earlier in the year when Mr. Rajoy relaxed his government’s targets for cutting the budget deficit.
However, not all economists are so pessimistic and some say the four-month-old government is starting to knuckle down to meeting the new targets, which still demand deeply unpopular austerity, and tackling the economy’s structural problems.
“We’ve seen more progress in a few days than in four months,” said Gilles Moec, a Deutsche Bank economist. “It’s a country that’s intrinsically sustainable, but it’s a country that needs to make decisions.”
Others beg to differ and fear Spain will drag in Italy, which has suffered similar problems with rising borrowing costs.
“As I look at my screen and Spain 10-year yields are up at 6 per cent – things are starting to get worrying again,” said Peter Westaway, chief economist for Europe at Vanguard, an investment management firm overseeing $1.8-trillion (U.S.) in assets.
“If they go up to 6.5 to 7 per cent, that could become very problematic, and if Italy started to go back above Spain again, then that would be really serious.”
Spain has one thing on its side. It has already raised nearly half the €86-billion ($113-billion) it needs to borrow from financial markets this year, sucking up some of the €1-trillion of cheap three-year loans that the European Central Bank has pumped into the euro zone banking sector.
This means the government could hang on for months before having to turn to the EU for help with its own funding needs.
However, that still leaves the banks. One of the critical “unknowables” for Spain is just how bad a situation its banks are in. The Spanish housing market, once a driver of the economy, has been in turmoil for more than four years, but prices still haven’t fallen as much as economists think is needed to squeeze the air out of the bubble.
Only when prices have bottomed will assessors be able to calculate how just much bad mortgage debt is sitting on the banks’ balance sheets, and therefore how much extra capital the sector requires to return it to health.