Litany of woes that placed Spain at heart of debt crisis

“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.”