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Tuesday, 29 May 2012

Mariano, we can’t hear you! Spain dropping deeper and deeper into the crisis

The Greek crisis has not reached its climax yet, while the Spanish crisis is deteriorating. Bankia’s massive losses is just a small indication of Spain’s increasing financial misery, and the conservative Spanish government under its Prime Minister Mariano Rajoy demonstrate themselves to be overwhelmed.

Bankia’s stock value has plunged by 25% yesterday, leading to an anxiety in the pension market, and even leading to worse assumptions of Spain becoming the next one on the list to receive EU aids. This was a result of its announcement to receive around 19 billion Euros from the Spanish government. For Spain’s fourth biggest bank this step is nearly equal to a complete take-over by the state. With this measure, the government attempts to maintain stability in its financial crippled sector. Its plans to restructure this sector could, however, cost up to 23 billion euros. How much Bankia will remain under attack is hard to say, but negative publicity will go on, with its former president (and former IMF managing director) Rodrigo Rato receiving up to 14 million Euros as an annual rent.

However, Rajoy assures to the public that Spain won’t need EU funds to stabilize its financial sector. This statement is premature, with the Spanish crisis entering the next stage. Spain, which is going through a prolonged crisis for year now, after the collapse of the real estate bubble, is paying higher and higher interest rates (currently 6,47 %) to receive cheap funds from abroad, the risk premium rises up to 511 points.

With the highest unemployment rate in the EU, a significant brain drain escaping from the crisis, limited contracts (in some cases less than a year), and a harshly reduced consumption rate of the remaining working population, it is only a matter of time until Spain will have to accept the fact that they cannot stabilize their economy and their financial sector without EU funds. The Rajoy administration still keeps a rigid austerity programme to push Spain out of the crisis. But with the crippled bank sector in Spain reaching a new critical level, austerity is going into the wrong way.

In the meantime, Rajoy avoids any potentially awkward public appearance, by letting his Deputy Prime Minister Soraya Sáenz de Santamaria do the public announcements. Being in office since the end of 2011, all hopes of the Spanish people to get out of the crisis are being shattered by the austerity strategy of Rajoy, which do have significant parallels with Greek austerity so far. It does not lead out of the crisis, but Spain is digging itself deeper and deeper into it. Rajoy’s public statements that the Euro-Zone shall not fall apart and that there is no alternative to the Euro might not be heard anymore, at least not most by financial analysts and economists.

What Spain is currently afraid of is the possible outcome of the Greek crisis. Being aware that they are the next ones on the line, Spain might drop into the same fiscal, monetary, and economic disaster Greece is currently going through. With Greece going bust and dropping out of the Euro-Zone, Spain will most likely be the next domino stone to tip over.

And then, the uncontrolled European chain reaction is very well under way.

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