Role of Spanish banks in Spain’s Debt Crisis

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For decades and centuries even, European Countries has been at loggerheads with each other. It was thought that, if Europe were to leave in peace and becoming a formidable strengths the rising power of the United States and the USSR they ought to come together. Thus decades following the Second World War, the made frantic efforts to coming together through a series of agreements and harmonizing their national laws and economies .
This report takes a look at how Spain got into the sovereign debt crisis that has engulfed the nation, and the contribution of their banks to this problem.

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Role of Spanish banks in Spain’s Debt Crisis

  1. 1. THE ROLE OF SPANISH BANKS IN SPAIN’S DEBT CRISIS.Akwasi Fosuhene468312European Business Environment Page 1
  2. 2. ContentsExecutive Summary _________________________________________________________________3Preface ___________________________________________________________________________4Introduction _______________________________________________________________________5The Coming together of Europe ________________________________________________________6A common monetary Union and the Euro_________________________________________________8A Union in Debt ____________________________________________________________________9Spanish angle of the crisis ____________________________________________________________11Housing Bubble and Burst____________________________________________________________12Role of the Banks __________________________________________________________________13Measures taken so far_______________________________________________________________16Conclusion _______________________________________________________________________17Bibliography ______________________________________________________________________19Page 2
  3. 3. Executive SummaryFor decades and centuries even, European Countries has been at loggerheads with each other. It was thoughtthat, if Europe were to leave in peace and becoming a formidable strengths the rising power of the UnitedStates and the USSR they ought to come together. Thus decades following the Second World War, the madefrantic efforts to coming together through a series of agreements and harmonizing their national laws andeconomies .By the early 2000s most of Europe had already come together and in their bid to further integrate theireconomies the Euro was born. This was heralded as a major feat and seen as the next step to creating apolitical union out of Europe akin to the United States. But then as everything was flourishing, the housingmarkets in America collapsed sending financial ripples across Europe due to the intertwine nature of theAmerican and European economies.Spain which, the fourth largest European economy was experiencing a streak of economic success with a tenyear uninterrupted growth. Just like America, the Spanish housing markets was high on the rise but there wereclear signs its runaway success was going to be short lived, and so it did. By 2008, the Spanish housing marketwhich had had tremendous growth cane to a screeching halt. This left most of Spanish savings banks known as"Caja" with large toxic debts due to their very risky lending during the estate market boom. The Spanishgovernment has had come in to rescue the banks from collapse through bail out packages largely from the EU.The government has taken a series of restructuring measures for the ailing banks as well as austeritymeasures aimed at reducing government spending.This report takes a look at how Spain got into the sovereign debt crisis that has engulfed the nation, and thecontribution of their banks to this problem.Page 3
  4. 4. PrefaceI started working on this research with very little expectation. At first I thought there not going to be thatmuch information and literature to find on the top. But his changed when I began to work on it. There was aWSJ video which goes at length to discussing the underlying problem of the Spain’s’ sovereign debt crisis andthis was very instrumental in helping me get a good idea of this topic.I got a lot of insights into the formation of EU, Eurozone and the Spanish debt problem as a whole.I thank John for reading over for me.Page 4
  5. 5. IntroductionAusterity, protests, increased taxes, Greece”; it is almost impossible to escape these keywords in the worldmedia. All the over the world, there is increased debate over sovereign debt crisis that has engulfed much ofthe world, especially Europe. The effects of this is a breakdown of tWithin the Eurozone, several countries, including Spain, Portugal, Ireland, Italy and most especially Greece arehaving troubles prepaying loans because the interest rates have risen to very high levels. A lot of the moneythat are owned by these countries are from banks within Germany and France and quite on top of thatSpanish and Irish banks are having to deal with a lot of toxic debtThe Spanish sent crisis although not as grossly overstated as that of Greece exhibits the problem with Europe.If not curtailed, it has the potential to send ripples across the while region.However, unlike Greece , the problems is not with large government borrowing but rather an overzealousbanking sector which sought to make the most out of real estate boom.Spain currently has the highest unemployment rate of any Eurozone country but with austerity measures fullyin place it remains to be seen how they are able to solve their unemployment problem. The EU on its part haspumped quite a lot of money into Spain in a bid to rescue it from failing but it will be interesting to see howmuch further they are willing to go.To put things in context, it is important to first establish how the European Union was formed, how the Euro ascommon currency for the Eurozone came into being, how it links up with Spain and the contribution Spanishbanks made to the sovereign debt crisis in their country,Page 5
  6. 6. The Coming together of EuropeFor decades, centuries even, most European countries were at loggerheads with each other. Fighting on awide variety of issues and over almost everything. Both the first and second worlds can both be attributed tothis. Shortly after the Second World War, most European countries were struggling to cope with the troublesthat come after a war. A lot of them were hit really hard and were struggling financially.Through this, European countries came to the conclusion that it was time they ended the war amongthemselves and come closer together. They were caught between two great super powers of the UnitedStates and the then USSR. But in order to stop fighting they needed something that will bring them togetherand make war a less suitable option in the future. They need to come up with something that will put themtogether, something they will all benefit and if that was achieved the hostility among nations will bediminished.At the backdrop of this, they sought to come close together and work to building a stronger economic, socialand political ties. The then West German, Netherlands, Belgium, Luxemburg and France met in Paris in andformed what was known as European Coal and Steel Community (ECSC) 1951. Four years later, The UnitedKingdom assumed observer role in this newly formed community.This precipitated into a trading area, largely trading in coal, coke, steel scrap and iron ore as well as building abond that will bring their political and military strength together. By March 1957, Italy had joined the groupand lead to the signing of the Rome treaty that year. However, it has by then the focus has then shifted into asthe Rome treated lead to the establishment of European Atomic Energy Community (EURATOM). This was tolead efforts in the development of atomic energy research and practical applications. Then a year later, theEuropean Economic Community (EEC) was formed. The main reason for this formation was to remove thebarriers that existed between the different nations and come together to form a common market for services,goods capital and a host of others. In a sense, the Europe Union as we know of it together largely came tofruition kicked off from this moment.To this point, the rather young community of likeminded European countries have cooperated very minimalfriction until France stepped in a bid to reduce the power of what was now becoming supranationalorganization. Another minor difficulty was that three agreements has been signed by the same national butthey were separate by themselves which had the potential to create misunderstand and overlap of functionsso in a bid to curtail this , they came together in 1965 to combined all these three different agreements tomake it one. The final details of the agreement did not suffice until two years later in Brussels. Thecombinations of the three agreements then came to be known as European Communities (EC). Throughoutthe 70s and 80s, more and more surrounding countries began to see the appeal of this the community ofEuropean countries and so countries like Denmark, United Kingdom Ireland and later Greece, Spain andPortugal joined in. 1East Germany Automatically became part of the group after uniting with their westerncounterparts. In February 1992, what has now come to be known as the European Union was signed inMaastricht was signed by all the members of the European Community. By 1995, Finland, Austria and Finlandhas joined the group making it bigger than ever before.Over several decades following the Second World War, European countries have been able to move fromconstant hostility to a strong trading block of nations who are strong together than ever before. However been1 http://www.cvce.eu/obj/negotiations_for_enlargement-en-19a4fd81-119d-4090-bfac-c7cc8ae64a20.htmlPage 6
  7. 7. faced with a new challenge of having to deal with sovereign debt crisis is something that will make or breakthe Union. Will Europe come out of this stronger or it will end up splitting them? In this document, severalaspects of how Europe’s debt crisis with clear emphasis on what role Spanish banks contributed to the debtcrisis will be take a close look at whilePage 7
  8. 8. A common monetary Union and the EuroAll this while that most of Europe has been coming together , they had their currencies, it was thought that ifthey needed to take their coming together to a different height, they need to more than just makingagreements. They needed to take more frantic steps at integrating their economies by having a commonbanking sector and adopt a single currency. A currency which will go on to be called the Euro, and so they did.In 1999the Euro came into force, becoming a noncash monetary unit. By January 2002, the use of thecommon European monetary unit came into full swing with member of 11 members adopting the euro astheir currency. 2 By 2011, the monetary zone has grown to 17 countries adding 6 more countries to theoriginal 11. 3To ensure that the world has a stable monetary standard, the United States decided to abolish pegging thedollar to the official price of gold. This in effect paved way for the abolishing of a static exchange rates.European countries have grown through the years of finding better ways integrating their economies andhaving stronger trade. However this will be impeded by currency fluctuations. There was more than 2.25% ofexchange rate fluctuations between EU countries, this was not good for trading. But to put things in gear,they Union had to put in place certain mechanisms that they will set things in motion and pave way for asmooth transition the Euro. This was known as the European Exchange Rate Mechanism (ERM).The creation of the single currency for Europe allowed the region more than ever brought countries within thesub region together. They could benefit from better trade among themselves due to the non-existence ofexchange rates, fluctuations and other complexities that comes with it. Among other reasons, the coming ofthe Euro into existence was highly regarded as monumental feat with very little complications, at least at theonset. I was also seen as a step closer to seeing a more federal Europe akin to the United States of America. Ina way, the Euro gave Europe a sort of identity.The formation of the Euro would not have been possible if all the nations still had their own centralized banks.Thus in a run up to the adoption the Euro by the current 17 countries they all had to abandon their individualcentral banks and wield power to what will become known and the European Central Bank (ECB). Within thiswas the European Monetary Union. Note that not all the 27 European Union member states had the Euro astheir currency but collectively all they all form part of a wider group known as Economic and Monetary Union(EMU).The formation of the EMU was a way that will help European countries to synchronize their economic andfiscal policies so that they are all at parity with each other. Also part of the responsibilities of membercountries was a promise to fulfill certain basic guidelines such as keeping their trade deficit to a certainminimum rate.42 http://ec.europa.eu/economy_finance/euro/why/index_en.htm3 http://www.ecb.int/euro/intro/html/map.en.html4 http://europa.eu/abc/12lessons/lesson_7/index_en.htmPage 8
  9. 9. A Union in DebtAll the while, the Eurozone has had a jolly ride with very little complications until 2009 when the housingbubble in the United States burst. After the burst of the dot com boom, stock markets hit rock bottom. TheUnited States Federal Reserve in their quest to spur investment and spending, they reduced interest rates. Forinvestors such as mutual and pension funds who bought treasury bills, this became very unattractive to themas the return of just 1% was simply not enough. However, they came with an idea, since borrowing hasbecoming cheaper, they thought of a way to connect home owners to other investors by packaging homeloans with other loans and selling them off.5 Collectively they were known as Collateralized Debt Obligations(CDO’s)6. The banks went on to further insure them to guarantee their payment for a small fee which wasknown as Credit Default Swaps (CDS’s)7.The growth of the housing market in the United States had basically been fueled the very tremendous growthby what is known as sub-prime mortgages. Home buyers were lured into buying property at a very low“teaser” interest rate and after a while, the rates will be readjusted for another rather. At this time, the peoplewho were given the loans to make the purchases could not afford the new rates anymore and this lead toseveral people defaulting on their loans. Loans were given to people who had very high risks and in noposition to pay for the houses that they have bought but the banks gave them money anyway. At this point,banks around the world came to the realization that they had to write of several billion of money since theywere left with “toxic debt”, European banks had become part of this.While the EU debt crisis were in some ways similar to what happened in the Unlike the United States, thecausation were in other ways different. The United States for instance has a common fiscal policy whichregulates all the states, Europe has no such thing. Countries were allowed to freely spend and borrow withvery little regulation. The Stability and Growth Pact 8which was supposed to keep various governments withinthe EU in check when it comes to their spending only required governments to limit their budget deficit tothree percent of their Gross Domestic Product(GDP). Most countries including Greece were spending waymore than they were required to but the EU did very little to stop them. 9. It was only after the financial crisisthat they made moves to curtail the spending of countries.As at that time that Europe was coming together, one major thing that was overlooked was the fact thatdifferent countries within the Union had different growth rate and development. Countries like Germany,Netherlands, Finland, Austria, were very highly developed and with strong economies. However, mostcountries in the Mediterranean region such a Greece, Spain, Italy and Portugal did not have such strong5 http://simplifyreality.com/?p=10576 http://www.investopedia.com/terms/c/cdo.asp7 http://www.globalresearch.ca/credit-default-swaps-evolving-financial-meltdown-and-derivative-disaster-du-jour/86348 http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm9 http://www.bloomberg.com/news/2010-05-17/euro-dies-slow-death-without-one-fiscal-policy-commentary-by-matthew-lynn.htmlPage 9
  10. 10. economies. On every policy that was agreed on, they agreed on them as Union and not taking inconsideration the peculiar challenges that each countries has. Without having much though about theeconomic growth and disparity that exists between the different countries there was always going to be aproblem with the countries with weaker economies. That became apparent when the world economy startedto tumble, most northern European Countries were doing just fine while their southern counterparts hadtroubles coping. One of the “hotspot countries”: Greece upon joining the Eurozone lied about their debts andtrade deficit and for the EU to provided and even challenging situation as all estimates and projections madewas based on false figures.Once it became clear that Greece was in a bad financial than first though, It posed serious risks to the stabilityof the Eurozone. Creditors started doubting if Greece was going to be able to pay their debt in the long termand because of that most of them moved in to demand what Greece owned them. Greece was put underintense pressure to pay back loans they owned to creditors.It became evident that Greece needed bailout to service its massive debt. In May 2010, the IMF and EUagreed to lend Greece €14.5 billion. 10This was part of bigger rescue page totaled at €130 billion.11 As arequirement of Greece for the financial bailout from the EU, they had to agree to series of measures that willhelp cut government spending and this put the country under extreme austerity leading to several protestsacross the country.Other countries such as Spain, Portugal and Italy followed suit. Any country with bad dynamics becamesusceptible and this posed serious threat to Europe’s banking system. It became even more serious fromsummer 2011 onwards, when the crisis wen just beyond Greece, Ireland and Portugal to threated Spain andItaly which were much bigger economies with bigger bond markets. Since many European banks had lend outmassive amounts to Spain and Italy they become very exposed. Real panic came when the debt crisis hit Italydue to its size. Unlike smaller economies, bailing them out was almost impossible due to its size.The EU by its makeup is very in making slow in arriving at decisions and thus not being able to react toproblems that can easily be fixed if confronted soon enough.10 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ201203201111 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320Page 10
  11. 11. Spanish angle of the crisisOnce the Eurozone countries started getting into financial difficulties and issues of sovereign debts, it was onlya matter of time before it reached Spain. However Spain’s woes will have a lot more detrimental effect on theregion than Greece and Ireland. It was the fourth largest Europe’s’ economy just behind The Germany, Franceand Italy12. The Spanish problem was in some ways different and other ways similar to what has happened incountries such as Ireland and Greece. The Spanish crisis was generated primarily by the bursting of thehousing market bubble in 2008 akin the housing market bubble of United States and Ireland, long term loans,sharp increase in unemployment which is not the highest in the Eurozone hovering around 24%13. By 2012,Credit rating Finch agency had downgraded Spain debt rating to BBB sighting the country’s high-level ofindebtedness as a major reason. 14The Spanish economy had a buoyant period, massive construction with a 150% increase in prices of housingproperties. The growth was largely driven low interest rates and immigration. When the Spain changed overtheir currency from the Spanish Pesta to Euro, it caused interest rates to reduce thereby making borrowingrelatedly easier than before. Immigration also contributed by making the demand for homes and otherproperty high on demand. By the middle of 2008, the economy has had 1 years of uninterrupted growth. TheSpanish economy was high on the rise, but there were clear indications that the boom was not sustainable inthe long run. 15By the first quarter of 2009, the Spanish economy had begun showing signs of weakness with the economycontracting by 3.7% and further reduction of 0.1% in the begging of the following year. 16For months, the Spanish government was in denial. They never were never willing to admit to the fact thattheir economy was in dying need of help or a bailout that other countries such as Greece has gotten. 17 Finallythe government gave in asked for help. Spain formally asked for a €100 billion bailout from the EU. However,unlike that of the bailout given to Greece this was without any strings but rather they have to only have toagree to reform tied to its banking sector. This was heralded by Spain’s Prime Minister Mariano Rajoy claimedit was not a bailout. i12 http://en.mercopress.com/2012/01/02/spanish-government-confirms-euro-zone-fourth-largest-economy-is-in-recession13 http://news.yahoo.com/spains-unemployed-inching-5-million-085011874--finance.html14 http://www.ft.com/intl/cms/s/0/3175685e-b081-11e1-8b36-00144feabdc0.html#axzz2IW9th7d715 http://www.ft.com/intl/cms/s/0/32cd35d0-f68b-11da-b09f-0000779e2340.html#axzz2IW9th7d716http://web.archive.org/web/20090610212457/http://www.forbes.com/feeds/afx/2009/02/18/afx6064245.html17 http://www.ft.com/intl/cms/s/0/776a8116-a34b-11e1-8f34-00144feabdc0.htmlPage 11
  12. 12. Housing Bubble and BurstFor a long streak of time, 1996 to 2008, the Spanish housing markets witness extensive growth unprecedentedgrowth. The growth of the housing market were largely fueled by a variety of interlinked factors. A major roleswas mass immigrations which ensued in the mid-90s due to immigrations reform which made Spain anattractive country for immigrants. Foreigners makes up to 10% of Spain’s current total population. Spain hadtraditionally had large families where children stayed at home to till their thirties. But once they started tointegrate more with Europe, this started to change. Youngsters were more willing to live on their own thanwith their parents. Changes in age structure and reduction of the normal household size. As well due to thebooming economy, people had more disposable income. All these factors put together created a surge for theincrease in housing property.Investors and banks jumped on and rapidly increasing the price of their properties. People felt that if they didnot purchase a property it will go way beyond their means in the short time so most home buyers who werenot financially sound to make purchases bought homes. This encouraged developers to build more houses, inareas where there were very few amenities such as water, electricity and gas to make it inhabitable. Suddenlythe housing market became very attractive for investors and banks. 18Bankers on their part capitalized on thehousing boom by lending to developers and selling them at inflated prices.Another twists to the Spanish real estate boom was that, developers bought the lands to build houses,however the reason they built the houses was not to rent it out to families at affordable costs and make aprofit out of it but rather they were looking at gaining a windfall from the sale of the lands and make a fortuneout of it. Unfortunately for the prices grew too high to the point that it was no longer sustainable, thiscoupled with the global property market bust, the housing boom in Spanish also collapsed in 2008 livingseveral banks with massive toxic debts in their book. With the flourishing of the housing market also camewith it a boom of other sectors of the economy thus once the housing market collapse it took with it otherparts of the economy.This has left banks and real estate developers with several unsold homes or uncompleted homes and thosethat have already been occupied had to be ejected because they had defaulted on the payments for theirhomes. During the boom, developers build 800,000 housing units in the year 2007 alone. IMF has said it willtake 4 and half years to clear unsold houses.18 http://www.spanishpropertyinsight.com/2009/04/29/spanish-housing-market-bubble-and-bust-explained/Page 12
  13. 13. Role of the BanksThe depth of Spanish debt problem and its repercussions on the Eurozone goes wide and deep. It is a farbigger economy than Greece and Ireland with biggest unemployment problem within the Eurozone. This hasthe potential to spill off into other neighboring countries since people will be willing to migrate to otherEuropean countries in search of a working prospects.After the burst, Spanish banks inherited the loans in almost €150billion in toxic property asset. Whichrepresents about 8.7% of all loans held by the country’s banks. 19The property market is now left with some1.3million homes for sale, but demand is estimated at just a quarter of that. The Spanish problem showsEurope is in a much deeper problem.Unlike other Greece, the Spanish government had their borrowing under the control, it had clean books untiljust the beginning of the financial crisis in 2008. Although the central government had clean books, its regionalgovernment had accrued massive debts on their own. This has left a lot of the regional governments inmassive debts and will need the help of the central government to bail them out. Collectively, the required atotal of €36billion bailout for the year 2012 alone.Spain is divided into 17 regional governments which have their own budges and are at will to borrow withoutconsulting the central government. During the times of economic boom, the borrowed heavily to lavishlyspend on new infrastructure and other projects. At the height of the boom, the regional governments enjoyeda swell in tax revenue largely from immigrants who had come to work on the new housing projects. Theygovernments in the regions decided to spend lavishly infrastructural projects. But when the bubble burst, sodid the taxes stopped coming. They were then left with the fate of their finishing off the projects they hadalready started or leave it to rot. To this effect they are left with only the option of having to rely on the centralgovernment to help them pay off the debts that they owe.The outfall of all this has left friction between regional government and the central government with some ofthe regions and especially Catalonia demanding complete financial autonomy from the central Spanishgovernment. 20There are however a few regional government which are not deep in debts. The region of Madrid has beenable to manage their affairs without needing a bailout from the central government. It has already covered allits refinancing needs for the year. Other regions like Navarra, Galicia, Cantabria, Aragon and the BasqueCountry have all managed to keep balanced book. 2119http://www.icbc.com.cn/icbc/investment/financial%20news/Level%20of%20Toxic%20Debts%20in%20Spanish%20Banks%20Reach%2017Year%20High.htm20 http://www.creditwritedowns.com/2012/07/spanish-regional-government-debt.html21 http://www.bbc.co.uk/news/business-18951575Page 13
  14. 14. Through the time of economic prosperity, the country’s GDP ratio was declining even though the economywas on the rise. Between 1999 and 2007, the country’s economy has declined from an annual growth of 3.7%to 1%.Before the height of the housing bubble, Spain had one of the best banking system, with high liquidity rationand seeking for relevant proof before giving out loans to those seeking loan facilities. However when thehousing bubble started, they became less stringent, forgoing their long held tradition of adequate checkupbefore giving out loans. They almost gave out money to anyone willing to buy a property. To put this inperspective, it is important to illustrate the different types of banks that exists in Spain. Financial system in Spain is divided into two, between commercial banks and savings banks.22Commercialbanks (Santander, BBVA) are big and have numerous branches all across the country. They gave out short termcredit facilities to the private sectors. The savings banks, known as “caja” on the other hand specializes insavings deposits and giving out loans. 23The Cajas are somewhat like mutual banks which could be found in every corner of Spain with one bank foralmost every 1,900 Spanish people. Until very recently, Cajas were very much left unregulated part of theSpanish banking sector. Since they were unregulated, they became the bank of choice for most developers aswell as people willing to buy a home during the housing market boom. 24They took full advantage of thesituation to give out loans and when the housing bubble wen burst, they were left with very large unpaidloans. This allowed them to own about 56% of all housing mortgages in Spain. During the property, the bankshad a run of growth with the housing market boom. Another major problem is the banks took the loans tolend to lender under a very risky scheme where they used the deposits of savers as deposits. 25Just like their regional counterparts, the regional banks came in dire of funding during after the bubble burst.Ratings agency Moody downgraded the credit rating of fifteen Spanish banks 26with banks are been forced tosell houses for half the original price after the bubble. 27 By the middle of 2012, the value of the Spanishproperty markets had fallen by almost 13%. This is the biggest drop in value since 2007. This sharp dropfurther deepens the Spanish economy’s woes as it will be even more difficult for the economy to bounce backto its former state. 2822 http://www.mongabay.com/history/spain/spain-banking.html23 http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption24 http://gainspainscapital.com/2012/04/29/the-dirty-secrets-of-spains-banking-system-that-99-of-analysts-fail-to-grasp/25 http://www.bbc.co.uk/news/business-1754997026 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13-year.html27 http://qz.com/36181/spains-housing-bubble-is-forcing-its-banks-to-sell-homes-at-half-of-what-was-paid-for-them/28 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13-year.htmlPage 14
  15. 15. In comparison to their savings banks counterparts, commercial banks such as Santander and BBVA are doingfairly well. This is because they say they saw the bubble of the housing market was not going to last and thusmade arrangements that will safeguard their future. Spanish banks has become of major concern to the Eurozone because a large part of what they owe belongsto other European banks and so therefore, their inability to bounce back will end out having rippling effect onother countries and banks within the region. The recession and the slow growth pace of the Spanish economyhas made it even more difficult for the banks to be able to turn around their fortunes.Page 15
  16. 16. Measures taken so farFor the Spanish economy to bounce back a lot of work has be done to restructure the whole economyespecially the banking sector. The Spanish government has already initiated measures to ensure than banksespecially the savings banks are more transparent in the way they do business. This has prompted stateprosecuted to order anti-corruption officials make an investigation into how banks operate29.Under the proposal, they will take measures to make Spain more entrepreneur friendly, new regulation for thepension scheme which will raise the retirement age from 65 to 67, set out spending ceilings for differentgovernment agencies.The Spanish government has also promised to institute a wide variety of reforms and outing in a placeausterity measures to reduce government’s spending and channel funds to where they are needed the most.Thee believe that by restructuring the banking sector and public sector, they will be able to improve way forinvestor confidence, something will need if they want to reduce the massive unemployment problem in thecountry. 30The banking sector has received a different bailout packages from the government and the EuropeanCommission. They banks receive another €37 billion bailout from the European stability Mechanism. In returnthey promised to restructure their banking sector by laying off 28% of their employees and closing some oftheir offices.Another restructuring effort from the government is to create a so-called Bad bank where they will be able totransfer all the toxic assets for the struggling banks. 31The difficulty here is it will be taking in its stride assetsthat have very weak demand.The European Union and IMF has also made a couple of their own recommendations that will help get thecountry back on track. This includes broadening the tax net so that more business and people pay theappropriate taxes, removal of red tapes for the setting up of businesses, sale of certain government assets,restructuring of the healthcare sector ,deregulation of the energy sector. 3229 http://www.eurointelligence.com/eurointelligence-news/news/singleview/article/prosecutor-launches-criminal-investigation-against-bank-of-spain.html?L=0&cHash=1a968e25a553260fb15d0a17aef646a830 http://rt.com/news/spain-union-protest-mass-228/31 http://www.euromoney.com/Article/3067434/Spains-bad-bank-Better-late-than-never.html?Type=Article&ArticleID=306743432 http://www.bloomberg.com/news/2012-09-25/spain-pledges-more-reforms-factbox-of-steps-taken-and-pending.htmlPage 16
  17. 17. ConclusionWithout doubt, the contribution of the Spanish banks to their nation’s sovereign is enormous. While thecentral government exercised prudence in spending banks and local government were borrowing andspending on projects when the income generation stream is not there leaving banks with several toxic debts.The sovereign debt in Spain, Greece, Portugal and other Eurozone countries shows the problem that existthing Europe. Not having a common fiscal policy shows how difficult it will be for the European Union to keepthe spending of member countries in check. The issues of disparity in develop between less developedSothern European countries and their more developed Northern European counties ought to have been takeninto account during the initial states of the Euro. The southern counterparts can just not keep pace with theirNorthern counterparts due to different economics dynamics that exists between them.Before the burst if the housing market bubble, Spains economy high on the rise largely heralded as aneconomic success. But even then it was evident that the success will not be long lived. Spanish regional bankstook full advantage of the situation are now been left with billions of toxic assets which has to be paid for withthe help of the EU and Spanish government. The interesting thing is how Spanish Cajas who have been soconservative in the way they gave out loans because so overwhelmed that they gave out on the old traditionof making proper background check of potential customers to ensure their credit worthiness. The Spanishgovernment for its part completely neglected the situation without taking any serious measures to ensurethat the prices for housing property and ...... sporadic ways if giving out of loans by the banks was curtailed.The banks influenced the debt crisis by making finds freely available to developers who were willing to buildhousing facilities at places with very little viability and prospective home owners.The Spanish government with help from the EU and IMF have made quite a lot frantic efforts to ease problemscaused by the Spain’s sovereign debt crisis. The government has slashed down on its public spending and havebecoming more stringent on banks that they are helping to bail out. The banks excised a lot of poor judgmentin lending money out freely without doing due diligence of prospective borrowers. As banks they aresupposed to exercise good judgment and ensure that they only give out money to people who are creditworthy.Regional governments and the banks ought to have known that the housing boom was not going to besustainable in the long term. Building housing property in areas where there were no social amenities wasonly going to turn into disaster in the future.Moving forward it, the Eurozone and Spain need to come to terms with the reasons why this problemoccurred and how best to solve them if they do happen in future. I remains to be seen how Spanish banks willbe able to pay the debts that they have accrued as a result of toxic debt in the future.The EU will have to be stringent on countries that they provide truth out and up to date information about thestrength of their economies, budgets deficits and other key performance indicators through mechanisms suchas the Stability and Growth Pact. Banks had to be properly regulated on how they acquire and invest moneynot just by regulatory bodies but by other bodies from the EU which will ensure that they do not go back tothe situation that created the debt crisis in the first place. These major challenges that countries within thePage 17
  18. 18. region are facing will act as litmus test for the future of the EU. It will give them the opportunity to facedifficult situations and make difficult decisions.Page 18
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