Litany of woes that placed Spain at heart of debt crisis

Wed, May 30, 2012, 01:00

“WHAT WOULD my customers think if I suddenly started charging them €4 instead of €2 for a glass of wine – and then on top of that I poured the rest of the bottle over their head? That’s how the banks are treating us.”

Antonio Arcos (35) is the owner of a small bar in central Madrid. The way he describes Spain’s banking crisis may be unusual, but the sentiment behind it isn’t.

Spaniards are angry at how they believe their politicians and bankers have mismanaged a financial sector that, in the space of just a few years, has gone from being touted as one of the world’s strongest to a major headache for the euro zone.

“The bankers are thieves,” says Arcos. “That’s all there is to it.”

Doubts about Spain’s banking system were already rife when the conservative government of Mariano Rajoy took power in December. Banks had invested heavily in property during a decade-long boom that ended when the international crisis hit Spain in 2008. Real estate prices fell and bad loans soared, leaving many banks exposed.

Among the most affected was Bankia, the result of the 2010 merger of seven small regional institutions, and which is now Spain’s fourth-largest bank. As its troubles mounted, the government part-nationalised Bankia this month as part of a sweeping financial reform.

On May 25th, Bankia requested a €19 billion rescue package from the government, on top of the €4.5 billion it had already received. This was the latest and by far the largest in a series of bank bailouts.

Spain has a litany of macroeconomic woes that have put it at the heart of the euro zone debt crisis: the EU’s highest jobless rate at 24.4 per cent, a public deficit of nearly 9 per cent and a double-dip recession. However, in recent weeks, Bankia and the financial system have become the focus of the country’s problems.

“The main problem in the Spanish financial system is we don’t know how bad things really are,” says David Gomez, an economist at Madrid’s Rey Juan Carlos University. “Every day we’re hearing more news about new needs for funds to cover the balances of banks. Right now it’s Bankia, but it won’t be the last.”

The uncertainty has even sparked rumours of a deposit run – which Bankia and the government have denied. But while ordinary Spaniards are angry at the public money going into banks, they are also worried.

Norma Cuellar (37), a psychologist, is a client of Bankia’s. “I can’t trust any bank here,” she says. “Even though we’re in Europe, you feel that the system could collapse. The authorities tell us our deposits are guaranteed, but I don’t believe that.”

She hasn’t yet transferred her money to another bank because she doesn’t “want to make things worse for the other clients”. But she’s considering changing to a French or German bank with branches in Spain.

While many Spaniards resent Germany and the austerity measures they believe it is imposing on their government, some also look to the north of Europe with envy, if not admiration.

“The way people behave in the north [of Europe] is different to how we behave here,” says José Roldan, a retired civil servant, as he left a branch of Bankia. Now 71, he has been a client for 50 years of one of the banks merged into Bankia. He wants to see the politicians and bankers who have mismanaged the financial system go to jail, but he also blames the Spanish way of life for the crisis.

“We like the good life and spending money on things,” he says. “And so do our governments.”

Economist David Gomez points out that, like Spain, many other European nations have put public funds into their banks. But the credibility of the Spanish authorities has been undermined by the timing of their actions, he says. “The problem in Spain is that [the bank clean-up] has been very late,” he says. “This crisis in the financial system started in 2008, and at that point the Bank of Spain was saying, ‘We have the best financial system in the world’. And four years later we discover the system needs all this help.”

Bankia’s parent company, BFA, revealed this week it had posted losses of €3.3 billion in 2011, rather than the €40 million profit it had initially announced, further shaking public confidence in the banks.

On Monday, as Spain’s borrowing costs rose to dangerous levels, prime minister Rajoy insisted in a press conference that he will not be requesting a bailout of any kind from the EU. But that has not stopped the debate in the media and on the street about the possibility of further meltdown, or even an Argentina-style corralito, in which bank deposits are frozen to prevent a capital flight.

Beauty consultant Lorena Lichardi (37) moved to Madrid from Argentina in 2002 precisely because of the corralito crisis. While she thinks a deposit freeze is a possibility, she says Spain is still some way from seeing the kind of economy-fuelled panic she witnessed in her native country a decade ago.

“People still aren’t having to get used to surviving on the minimum yet,” she says. “For a lot of Spaniards, this crisis still just means they can’t have two cars and a nice holiday.”