Analysis: Spain faces corrosion not collapse from euro crisis

BARCELONA, Spain Sat May 12, 2012 3:59pm EDT

A woman stands under session information screens at the Madrid bourse April 27, 2012. REUTERS/Andrea Comas

A woman stands under session information screens at the Madrid bourse April 27, 2012.

Credit: Reuters/Andrea Comas

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BARCELONA, Spain (Reuters) - Students are protesting on Barcelona's elegant boulevards, public-sector wages are being cut for the second time in three years and resentment is growing against the central government and beneficiaries of bank bailouts.

Such is the daily fallout from the euro zone's debt crisis. Like the rest of Spain, Barcelona is looking at several years of hard grind as the country adjusts to living within its means after the collapse of a debt-financed housing bubble that has brought much of the banking sector to its knees.

Yet unless the most pessimistic projections of the cost of rescuing the banks prove right, the signs are that Spain faces corrosion not collapse.

Greece risks suddenly not being able to pay for vital imports if it cannot form a new government that sticks to the terms of an international bailout. But Spain is more representative of the generally insidious, demoralizing nature of the crisis: austerity is sapping trust in politicians across the euro zone and fraying the social fabric as the bills for years of economic mismanagement are shared out.

"The problem is social. What are we going to do when we have 25 percent unemployment? It's dramatic," said Joan Ramon Rovira, head of economic studies at the Barcelona chamber of commerce.

Even though every fourth Spaniard is unemployed, job protection is being eroded. In Barcelona, capital of the northeastern region of Catalonia, hospital wards are being closed, class sizes are growing and university fees are rising.

The result is a hardening of attitudes as various groups campaign to preserve their entitlements. The crisis has also ratcheted up political tensions with Madrid as supporters of Catalan independence increasingly begrudge helping to bankroll the central government, which they feel treats them with disdain.

"Spain is a backpack that is too heavy for us to keep carrying. It's costing us our development," said the spokesman for Catalan President Artur Mas, Joan Maria Pique.

EXPORTS RISING, HOUSE PRICES FALLING

Rovira is optimistic that Spain will pull through. He produces figures showing how smartly exports are rising from Catalonia, which makes up 20 percent of the national economy and generates about 30 percent of its exports.

Spain's exports rose 11 percent last year as it gradually restored the competitiveness lost when wages spurted after the launch of the euro in 1999. The government expects the current account deficit to shrink to under 1 percent of GDP this year from a peak of 10 percent in 2007.

Joerg Kraemer, chief economist with Commerzbank in Frankfurt, estimated that Spain had recouped half of the pre-crisis deterioration in relative labor costs, a trend that should continue because of recent reforms making pay and contracts more flexible.

The priority now, according to Catalonia's economy minister Andreu Mas-Colell is for firms in the region to bulk up. "The bright spot in our economy is exports," he said in an interview. "But our firms are too small. In an export-oriented economy size is important. We are too fragmented."

In contrast to progress on external economic rebalancing, Spain is dragging its feet on reducing its budget deficit and is being punished by investors.

Ten-year government bonds yield around 6 percent, a level that is unsustainable in the long run, on concerns that Madrid will have to spend tens of billions of euros to stop the rot in its banking system.

Spanish banks have more than 180 billion euros of sour property assets on their books, and analysts fear there is worse to come as recession triggers more corporate and mortgage defaults.

The Spanish government sought to boost investor confidence on Friday by ordering banks to set aside a further 30 billion euros in loan-loss provisions, two days after taking effective control of Bankia SA, one of the leading banks. But the financial markets were unimpressed.

The attempted clean-up is the fourth, and Edward Hugh, an independent economist near Barcelona who says the government has been too slow to get to grips with the meltdown, doubts it will be the last.

"The key question is where the price of property is going to settle. Until we know that, it's all guesswork," he said.

House prices have fallen about 25 percent since 2007 and a Reuters poll published on Friday pointed to a further decline of more than 15 percent in 2012-2013.

Morgan Stanley's base case is that banks will need 25 billion euros in capital. Royal Bank of Scotland expects a 68 billion euro shortfall over the next three years.

Roubini Global Economics sees losses ranging from 130 billion euros to 300 billion euros and attaches a 60 percent probability to the need for a sovereign bailout followed, in 2015, by a restructuring of Spain's debt.

But the chief economist of one local bank, who requested anonymity because the government was still finalizing its latest clean-up, said the extra provisioning being demanded by the market made sense only if Spain were to be stuck in recession for several years.

"If it's needed to restore credibility and reduce the risk premium on our bonds, then maybe we have to do it. But I think the markets are overshooting," he said.

REGIONAL FEUDING

The urgency of stabilizing Spain's fast-growing stock of debt is shining the spotlight on its 17 autonomous regions, which account for about half of general government spending and whose debt has almost doubled in the past three years.

The regions accounted for 55 percent of last year's general government deficit of 8.5 percent of GDP, according to JP Morgan, and Madrid has passed a law threatening to take direct control of their budgets unless they rein in spending.

Seen from Barcelona, though, things are not so simple.

Catalonia and other regions are responsible for managing public services, but Madrid retains most regulatory and tax-and-spend powers. This is a recipe for friction when economic times are tough: the tax take plummets, but demand for health and education does not.

As a result, Barcelona frequently finds itself going cap in hand to Madrid to plug its cash shortfall even though Catalonia, Spain's richest region, transfers more than 8 percent of its GDP every year in net taxes to the central government.

At the same time, Catalonia's ruling centre-right Convergence and Union (CiU) nationalist party says Madrid has withheld promised investment funds in pursuit of what it regards as a blatant agenda of centralizing power and suffocating Catalonia.

"We understand that Spain is going through a crisis and reforms are needed. We are all in the same boat." Mas-Colell said. "What irritates us is that the crisis could be used as an opportunity to limit our self-government or to not honor commitments made in the past."

Catalonia wants to negotiate a new fiscal deal that gives it more autonomy. But, saddled with a debt approaching 22 percent of regional output, its political hand looks weak.

In the meantime, it is making more cuts. Health spending will fall 4.8 percent this year after a 6.5 percent drop in 2011. Regional public-sector salaries are being reduced 5 percent on top of a similar nationwide cut in 2010. A school building program has been halted and Catalans will soon start contributing to the cost of prescriptions.

"We're going out on a limb, but we think our voters will understand the constraints in which we live," Mas-Colell said.

NOT FAIR

Conversations in Barcelona suggest that people do understand the need for belt-tightening. Importantly, strong family ties constitute a safety net of sorts for the unemployed. But there is a sense that the sacrifices are not being fairly shared.

Felipe Aranguren, 59, who works when he can as a sociologist, rails against Spain's "rotten" banks and wants higher taxes on the rich to pay for a "New Deal" public-works program.

A black star, the symbol of anarchism, is pinned to his lapel, but Aranguren does not think that dumping the euro and going it alone would ease Spain's plight.

"Economically speaking, we can't do anything in Spain because everything is decided in Brussels. But leaving Europe would be just one more problem," he said.

Joan Colom, an economist at the University of Barcelona, said his department had been forced to let go a lot of young lecturers and slash research.

He was optimistic that Spain would overcome the crisis but was critical of the laser-like focus on austerity. "We will pay a cost, for sure, and it could be higher than necessary," said Colom, a former head of the Catalan Court of Auditors.

Psychology student Celia Nisare Bleda, 19, fears that students from poorer families will bear the brunt of the education cuts. With every second young Spaniard out of work, she suspects that not even a degree will be enough to secure a job in Spain that pays decently.

Lots of students were going abroad in search of a better future. So would she if necessary. "With the salaries we're likely to get, there's no possibility of having a good life. We'll be living all our lives like students." Nisare Bleda said.

(editing by Janet McBride)

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Comments (4)
gee.la wrote:
Have you seen a tree collapse in the wild? When a big trunk faces corrosion for a while (such as several years), it collapses.

May 12, 2012 4:47pm EDT  --  Report as abuse
scythe wrote:
to begin with, they need a massive capital gains tax for real estate speculation and hedgefund gambling – maybe hollande’s idea of a 75% tax rate for the obscenely wealthy …. nothing like a crisis to find new ways to redistribute wealth

nevertheless the sun will rise another day for spain, regardless of the morose reporting

the young are living in more prosperous areas of the EU, a single market with equal citizenship

May 12, 2012 5:25pm EDT  --  Report as abuse
Eric93 wrote:
Leaving Europe may be ‘one more problem’ that could turn out to be a ‘solution’ (to the other problems).

May 13, 2012 4:20am EDT  --  Report as abuse
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