Pressured by other EU governments, Spain has asked the EU for €125 billion in aid to bail out its banks. European leaders say this amount well exceeds what is needed, but they are miscalculating. As with Greece, the aid package is likely too little to permanently quell investor fears that Spain’s banks will collapse, and conditions imposed by Germany could make Spain’s situation worse.
Spain’s predicament is wholly different from Greece and Italy—its government is hardly inclined to spend too much.
Prior to the global financial crisis, Spain enjoyed a boom in tourism and home construction, as richer northern Europeans sought vacations and second homes in its sunny climate. Robust construction and tourism drove growth and provided Madrid with adequate taxes. Unlike Rome and Athens, it enjoyed persistent budget surpluses.
Foreigners invested in Spanish bank securities, and the latter financed a hotel and housing boom. In the wake of the financial crisis, loans defaulted and Spanish banks were stuck with non-performing real estate loans.
Unlike the Federal Reserve, Spain’s central bank cannot print money to mop up bad loans, and the European Central Bank is not empowered to bail out banks and impose reforms. Hence, Spain’s national government had to borrow euros in international bond markets to save its banks.Page 1 of 4 | Next Page