Spain Says Banks in Credit Crunch
Spanish officials acknowledged that the country's banks and companies are having difficulty finding credit, underscoring the pressure Madrid faces to pursue deep structural changes to win back investor confidence.
Investors are particularly concerned that Spain would be unable to supply its banks with more capital, if needed, without emergency aid from the European Union and the International Monetary Fund.
Spain has been scrambling in recent weeks to convince markets that it can repair both its ballooning deficit and its troubled banking sector. Spain's Socialist government plans on Wednesday to begin pushing through a controversial labor-market overhaul that seeks to address a problem that many economists say is at the heart of Europe's economic malaise: rigid labor markets that dissuade companies from investing.
One big worry has been the increasing difficulty Spanish banks have faced borrowing from other banks in the so-called interbank lending market, an important source of funding that banks rely on for short-term liquidity needs. Spanish banks--including its savings banks, or cajas--have suffered massive losses amid a steep downturn in the country's real-estate market.
Spanish officials have largely been quiet on the issue but on Monday Treasury Secretary Carlos Ocaña, speaking at an economics conference, said tightness of credit for Spain "is a problem."
"Obviously we do need for the markets to loosen," he added.
At the same conference, Francisco González, chairman of Banco Bilbao Vizcaya Argentaria SA, the country's second-largest bank, said credit markets remain "closed" for many companies and urged the country to accelerate the pending reforms. "It's a priority that we restore market confidence," he said.
German Chancellor Angela Merkel, responding to speculation that Spain may be forced to follow Greece in seeking aid from the EU and the IMF, said late Monday that Spain could tap the EU's rescue fund if necessary. "If there should be problems--and we shouldn't talk them up--the mechanism can be activated at any time," Ms. Merkel said at a joint news conference with French President Nicolas Sarkozy in Berlin.
Last month in the wake of a €110 billion ($133 billion) bailout of Greece, the EU and the IMF set up an emergency fund for members of the euro zone.
The European Commission dismissed talk of a bailout for Spain. "There is no plan under discussion to provide for assistance to any member state," spokesman Amadeu Altafaj said Monday. Referring to reports in the German press that a Spanish bailout was being readied, Pia Ahrenkilde Hansen, the commission's top spokeswoman, said there is "no such preparation, no such plan."
The office of Spain's prime minister on Monday said there is no aid package and that "Spain hasn't asked for anything, not even one euro."
Europe's debt crisis is forcing the Continent's most vulnerable countries to make deep cuts to government spending while also finding ways to spur recovery. At a time of questions regarding the viability of Europe's common currency, Spain is a crucial testing ground. Its €1 trillion economy is the fourth-largest in the 16-nation euro zone, accounting for about 11% of the region's economic output. By comparison, Europe's other teetering economies, Greece, Ireland and Portugal, together account for roughly 6%.
Many economists argue that the only way for such countries to rebound is for governments to unshackle their heavily regulated economies by making it easier for businesses to operate.
Spain "as a whole needs to become more competitive, and the labor market is one of its least competitive parts," said Fernando Fernández, an economist and professor at Madrid's IE Business School.
The country has a two-tier labor market similar to those in France and Germany. One level typically includes older, skilled workers in jobs that pay well and are protected. The second consists of younger workers who earn less and can be easily dismissed. Critics say this system has resulted in high youth unemployment and argue that deregulating the first tier would lead to the creation of more and better jobs.
Plans for the labor-market overhaul come as Spain's government rushes to prepare other reforms, including a restructuring of the country's banking sector, that are also considered crucial. Investors have been pushing for such changes amid concerns about Spain's rising debt burden, and lenders have been charging higher premiums.
Last week, in a €3.9 billion auction of three-month bonds, Spain offered investors an average yield of 3.3%, compared with a yield of only 2% for a similar auction in April. The difference, or spread, between the yield on Spanish bonds and German debt recently widened to its highest level since the introduction of the euro, a further reflection of investor concern over Spanish debt.
The central government has to borrow €97 billion this year to finance a €553 billion national debt. The increase in borrowing costs could complicate Spain's effort to progressively lower its deficit down from 11% last year, to 9% by the end 2010, and back to within the euro zone limit of 3% by 2013.
Spain's private sector is also facing tighter credit conditions, as lenders remain wary of the impact that a collapsed housing market and shrinking economy could eventually have on the financial sector. Banks don't know how many more bad loans will develop as borrowers continue to succumb to the downturn. And the value of properties that banks now have on their books continues to shrink along with prices of Spanish real estate.
Spain loosened conditions for the use of short-term job contracts in 1997. The change fueled employment during Spain's real-estate driven boom. But it also created a job market that gobbles up workers during growth periods, and quickly disgorges them during downturns.
Most of the millions of jobs created in Spain during the economic expansion were short term--leading many workers to bounce from job to job, often with minimal wages. When the downturn hit, the labor market collapsed. A jobless roster of 1.7 million people in 2007 soared to over 4.6 million by the end of March--a jobless rate of 20%.
Then there are the millions hired under Spain's old labor laws. The security offered by their job contracts, and progressively better benefits, often means it is cheaper for employers to keep them than to pay their severance during downturns. It's also cheaper, in many instances, to put up with unproductive workers than to face the severance and legal implications of their dismissal.
The measures disclosed in a government draft last week would lower severance pay entitlements for new hires to 33 days, from 45, for each year of the worker's employment. In a bid to encourage employers to rely less on temporary workers, the government would also use a state fund to bear the cost of eight of those days as long as the worker was hired on a long-term contract.
The government, which is discussing the draft with unions, employer groups, and rival parties, plans to present the decree to parliament next week. The assembly can block a decree if rivals muster enough support--an outcome that in May nearly derailed a €15 billion austerity plan that conservatives deemed too tepid.
The center-right Popular Party says it could challenge the labor reform if a final version doesn't include stricter measures, including less judicial interference for certain types of dismissals and a change in collective bargaining rules that would give individual companies--as opposed to broad industry groups--greater say in labor negotiations.
[Source: By Paulo Prada, The Wall Street Journal, Madrid, 15jun10]
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