role of spanish banks in spain’s debt crisis

THE ROLE OF SPANISH BANKS IN SPAIN’S DEBT CRISIS.

Akwasi Fosuhene

468312

European Business Environment

Contents

Executive Summary _________________________________________________________________ 3

Preface ___________________________________________________________________________ 4

Introduction _______________________________________________________________________ 5

The Coming together of Europe ________________________________________________________ 6

A common monetary Union and the Euro _________________________________________________ 8

A Union in Debt ____________________________________________________________________ 9

Spanish angle of the crisis ____________________________________________________________ 11

Housing Bubble and Burst ____________________________________________________________ 12

Role of the Banks __________________________________________________________________ 13

Measures taken so far _______________________________________________________________ 16

Conclusion _______________________________________________________________________ 17

Bibliography ______________________________________________________________________ 19

Executive Summary

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 .

By the early 2000s most of Europe had already come together and in their bid to further integrate their

economies the Euro was born. This was heralded as a major feat and seen as the next step to creating a

political union out of Europe akin to the United States. But then as everything was flourishing, the housing

markets in America collapsed sending financial ripples across Europe due to the intertwine nature of the

American and European economies.

Spain which, the fourth largest European economy was experiencing a streak of economic success with a ten

year uninterrupted growth. Just like America, the Spanish housing markets was high on the rise but there were

clear signs its runaway success was going to be short lived, and so it did. By 2008, the Spanish housing market

which 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 Spanish

government 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 austerity

measures 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 the

contribution of their banks to this problem.

Preface

I started working on this research with very little expectation. At first I thought there not going to be that

much information and literature to find on the top. But his changed when I began to work on it. There was a

WSJ video which goes at length to discussing the underlying problem of the Spain’s’ sovereign debt crisis and

this 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.

Introduction

Austerity, protests, increased taxes, Greece”; it is almost impossible to escape these keywords in the world

media. All the over the world, there is increased debate over sovereign debt crisis that has engulfed much of

the world, especially Europe. The effects of this is a breakdown of t

Within the Eurozone, several countries, including Spain, Portugal, Ireland, Italy and most especially Greece are

having troubles prepaying loans because the interest rates have risen to very high levels. A lot of the money

that are owned by these countries are from banks within Germany and France and quite on top of that

Spanish and Irish banks are having to deal with a lot of toxic debt

The 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 overzealous banking 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 fully in place it remains to be seen how they are able to solve their unemployment problem. The EU on its part has pumped quite a lot of money into Spain in a bid to rescue it from failing but it will be interesting to see how much 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 as

common currency for the Eurozone came into being, how it links up with Spain and the contribution Spanish

banks made to the sovereign debt crisis in their country,

The Coming together of Europe

For decades, centuries even, most European countries were at loggerheads with each other. Fighting on a

wide variety of issues and over almost everything. Both the first and second worlds can both be attributed to

this. Shortly after the Second World War, most European countries were struggling to cope with the troubles

that 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 among

themselves and come closer together. They were caught between two great super powers of the United

States and the then USSR. But in order to stop fighting they needed something that will bring them together

and make war a less suitable option in the future. They need to come up with something that will put them

together, something they will all benefit and if that was achieved the hostility among nations will be

diminished.

At the backdrop of this, they sought to come close together and work to building a stronger economic, social

and political ties. The then West German, Netherlands, Belgium, Luxemburg and France met in Paris in and

formed what was known as European Coal and Steel Community (ECSC) 1951. Four years later, The United

Kingdom 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 a

bond that will bring their political and military strength together. By March 1957, Italy had joined the group

and lead to the signing of the Rome treaty that year. However, it has by then the focus has then shifted into as

the Rome treated lead to the establishment of European Atomic Energy Community (EURATOM). This was to

lead efforts in the development of atomic energy research and practical applications. Then a year later, the

European Economic Community (EEC) was formed. The main reason for this formation was to remove the

barriers 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 to

fruition kicked off from this moment.

To this point, the rather young community of likeminded European countries have cooperated very minimal

friction until France stepped in a bid to reduce the power of what was now becoming supranational

organization. Another minor difficulty was that three agreements has been signed by the same national but

they were separate by themselves which had the potential to create misunderstand and overlap of functions

so in a bid to curtail this , they came together in 1965 to combined all these three different agreements to

make it one. The final details of the agreement did not suffice until two years later in Brussels. The

combinations of the three agreements then came to be known as European Communities (EC). Throughout

the 70s and 80s, more and more surrounding countries began to see the appeal of this the community of

European countries and so countries like Denmark, United Kingdom Ireland and later Greece, Spain and

Portugal joined in. 1East Germany Automatically became part of the group after uniting with their western

counterparts. In February 1992, what has now come to be known as the European Union was signed in

Maastricht was signed by all the members of the European Community. By 1995, Finland, Austria and Finland

has joined the group making it bigger than ever before.

Over several decades following the Second World War, European countries have been able to move from

constant hostility to a strong trading block of nations who are strong together than ever before. However been

1 http://www.cvce.eu/obj/negotiations_for_enlargement-en-19a4fd81-119d-4090-bfac-c7cc8ae64a20.html

faced with a new challenge of having to deal with sovereign debt crisis is something that will make or break

the Union. Will Europe come out of this stronger or it will end up splitting them? In this document, several

aspects of how Europe’s debt crisis with clear emphasis on what role Spanish banks contributed to the debt

crisis will be take a close look at while

A common monetary Union and the Euro

All this while that most of Europe has been coming together , they had their currencies, it was thought that if

they needed to take their coming together to a different height, they need to more than just making

agreements. They needed to take more frantic steps at integrating their economies by having a common

banking 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 the

common European monetary unit came into full swing with member of 11 members adopting the euro as

their currency. 2 By 2011, the monetary zone has grown to 17 countries adding 6 more countries to the

original 11. 3

To ensure that the world has a stable monetary standard, the United States decided to abolish pegging the

dollar 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 and

having stronger trade. However this will be impeded by currency fluctuations. There was more than 2.25% of

exchange 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 a

smooth 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 the

sub region together. They could benefit from better trade among themselves due to the non-existence of

exchange rates, fluctuations and other complexities that comes with it. Among other reasons, the coming of

the Euro into existence was highly regarded as monumental feat with very little complications, at least at the

onset. I was also seen as a step closer to seeing a more federal Europe akin to the United States of America. In

a 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 individual

central banks and wield power to what will become known and the European Central Bank (ECB). Within this

was the European Monetary Union. Note that not all the 27 European Union member states had the Euro as

their 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 and

fiscal policies so that they are all at parity with each other. Also part of the responsibilities of member

countries was a promise to fulfill certain basic guidelines such as keeping their trade deficit to a certain

minimum rate.4

2 http://ec.europa.eu/economy_finance/euro/why/index_en.htm 3 http://www.ecb.int/euro/intro/html/map.en.html 4 http://europa.eu/abc/12lessons/lesson_7/index_en.htm

A Union in Debt

All the while, the Eurozone has had a jolly ride with very little complications until 2009 when the housing

bubble in the United States burst. After the burst of the dot com boom, stock markets hit rock bottom. The

United States Federal Reserve in their quest to spur investment and spending, they reduced interest rates. For

investors such as mutual and pension funds who bought treasury bills, this became very unattractive to them

as the return of just 1% was simply not enough. However, they came with an idea, since borrowing has

becoming cheaper, they thought of a way to connect home owners to other investors by packaging home

loans 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 was

known as Credit Default Swaps (CDS’s)7.

The growth of the housing market in the United States had basically been fueled the very tremendous growth

by 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 people

who were given the loans to make the purchases could not afford the new rates anymore and this lead to

several people defaulting on their loans. Loans were given to people who had very high risks and in no

position 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 they

were 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, the

causation were in other ways different. The United States for instance has a common fiscal policy which

regulates all the states, Europe has no such thing. Countries were allowed to freely spend and borrow with

very little regulation. The Stability and Growth Pact 8which was supposed to keep various governments within

the EU in check when it comes to their spending only required governments to limit their budget deficit to

three percent of their Gross Domestic Product(GDP). Most countries including Greece were spending way

more than they were required to but the EU did very little to stop them. 9. It was only after the financial crisis

that 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 that

different 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, most

countries in the Mediterranean region such a Greece, Spain, Italy and Portugal did not have such strong

5 http://simplifyreality.com/?p=1057 6 http://www.investopedia.com/terms/c/cdo.asp 7 http://www.globalresearch.ca/credit-default-swaps-evolving-financial-meltdown-and-derivative-disaster-du-jour/8634 8 http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm 9 http://www.bloomberg.com/news/2010-05-17/euro-dies-slow-death-without-one-fiscal-policy-commentary-by-matthew-lynn.html

economies. On every policy that was agreed on, they agreed on them as Union and not taking in

consideration the peculiar challenges that each countries has. Without having much though about the

economic growth and disparity that exists between the different countries there was always going to be a

problem with the countries with weaker economies. That became apparent when the world economy started

to tumble, most northern European Countries were doing just fine while their southern counterparts had

troubles coping. One of the “hotspot countries”: Greece upon joining the Eurozone lied about their debts and

trade deficit and for the EU to provided and even challenging situation as all estimates and projections made

was based on false figures.

Once it became clear that Greece was in a bad financial than first though, It posed serious risks to the stability

of the Eurozone. Creditors started doubting if Greece was going to be able to pay their debt in the long term

and because of that most of them moved in to demand what Greece owned them. Greece was put under

intense 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 EU

agreed to lend Greece €14.5 billion. 10This was part of bigger rescue page totaled at €130 billion.11 As a

requirement of Greece for the financial bailout from the EU, they had to agree to series of measures that will

help cut government spending and this put the country under extreme austerity leading to several protests

across the country.

Other countries such as Spain, Portugal and Italy followed suit. Any country with bad dynamics became

susceptible and this posed serious threat to Europe’s banking system. It became even more serious from

summer 2011 onwards, when the crisis wen just beyond Greece, Ireland and Portugal to threated Spain and

Italy which were much bigger economies with bigger bond markets. Since many European banks had lend out

massive amounts to Spain and Italy they become very exposed. Real panic came when the debt crisis hit Italy

due 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 to

problems that can easily be fixed if confronted soon enough.

10 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320 1111 http://www.reuters.com/article/2012/03/20/us-greece-payment-idUSBRE82J0GQ20120320

Spanish angle of the crisis

Once the Eurozone countries started getting into financial difficulties and issues of sovereign debts, it was only

a matter of time before it reached Spain. However Spain’s woes will have a lot more detrimental effect on the

region than Greece and Ireland. It was the fourth largest Europe’s’ economy just behind The Germany, France

and Italy12. The Spanish problem was in some ways different and other ways similar to what has happened in

countries such as Ireland and Greece. The Spanish crisis was generated primarily by the bursting of the

housing 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 of

indebtedness as a major reason. 14

The Spanish economy had a buoyant period, massive construction with a 150% increase in prices of housing

properties. The growth was largely driven low interest rates and immigration. When the Spain changed over

their currency from the Spanish Pesta to Euro, it caused interest rates to reduce thereby making borrowing

relatedly easier than before. Immigration also contributed by making the demand for homes and other

property high on demand. By the middle of 2008, the economy has had 1 years of uninterrupted growth. The

Spanish economy was high on the rise, but there were clear indications that the boom was not sustainable in

the long run. 15

By the first quarter of 2009, the Spanish economy had begun showing signs of weakness with the economy

contracting by 3.7% and further reduction of 0.1% in the begging of the following year. 16

For months, the Spanish government was in denial. They never were never willing to admit to the fact that

their economy was in dying need of help or a bailout that other countries such as Greece has gotten. 17 Finally

the 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 to

agree to reform tied to its banking sector. This was heralded by Spain’s Prime Minister Mariano Rajoy claimed

it was not a bailout. i

12 http://en.mercopress.com/2012/01/02/spanish-government-confirms-euro-zone-fourth-largest-economy-is-in-recession 13 http://news.yahoo.com/spains-unemployed-inching-5-million-085011874--finance.html 14 http://www.ft.com/intl/cms/s/0/3175685e-b081-11e1-8b36-00144feabdc0.html#axzz2IW9th7d7 15 http://www.ft.com/intl/cms/s/0/32cd35d0-f68b-11da-b09f-0000779e2340.html#axzz2IW9th7d7 16 http://web.archive.org/web/20090610212457/http://www.forbes.com/feeds/afx/2009/02/18/afx6064245.html 17 http://www.ft.com/intl/cms/s/0/776a8116-a34b-11e1-8f34-00144feabdc0.html

Housing Bubble and Burst

For a long streak of time, 1996 to 2008, the Spanish housing markets witness extensive growth unprecedented

growth. The growth of the housing market were largely fueled by a variety of interlinked factors. A major roles

was mass immigrations which ensued in the mid-90s due to immigrations reform which made Spain an

attractive country for immigrants. Foreigners makes up to 10% of Spain’s current total population. Spain had

traditionally had large families where children stayed at home to till their thirties. But once they started to

integrate more with Europe, this started to change. Youngsters were more willing to live on their own than

with their parents. Changes in age structure and reduction of the normal household size. As well due to the

booming economy, people had more disposable income. All these factors put together created a surge for the

increase in housing property.

Investors and banks jumped on and rapidly increasing the price of their properties. People felt that if they did

not purchase a property it will go way beyond their means in the short time so most home buyers who were

not financially sound to make purchases bought homes. This encouraged developers to build more houses, in

areas where there were very few amenities such as water, electricity and gas to make it inhabitable. Suddenly

the housing market became very attractive for investors and banks. 18Bankers on their part capitalized on the

housing 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 a

profit out of it but rather they were looking at gaining a windfall from the sale of the lands and make a fortune

out of it. Unfortunately for the prices grew too high to the point that it was no longer sustainable, this

coupled with the global property market bust, the housing boom in Spanish also collapsed in 2008 living

several banks with massive toxic debts in their book. With the flourishing of the housing market also came

with it a boom of other sectors of the economy thus once the housing market collapse it took with it other

parts of the economy.

This has left banks and real estate developers with several unsold homes or uncompleted homes and those

that have already been occupied had to be ejected because they had defaulted on the payments for their

homes. During the boom, developers build 800,000 housing units in the year 2007 alone. IMF has said it will

take 4 and half years to clear unsold houses.

18 http://www.spanishpropertyinsight.com/2009/04/29/spanish-housing-market-bubble-and-bust-explained/

Role of the Banks

The depth of Spanish debt problem and its repercussions on the Eurozone goes wide and deep. It is a far

bigger economy than Greece and Ireland with biggest unemployment problem within the Eurozone. This has

the potential to spill off into other neighboring countries since people will be willing to migrate to other

European countries in search of a working prospects.

After the burst, Spanish banks inherited the loans in almost €150billion in toxic property asset. Which

represents about 8.7% of all loans held by the country’s banks. 19The property market is now left with some

1.3million homes for sale, but demand is estimated at just a quarter of that. The Spanish problem shows

Europe is in a much deeper problem.

Unlike other Greece, the Spanish government had their borrowing under the control, it had clean books until

just the beginning of the financial crisis in 2008. Although the central government had clean books, its regional

government had accrued massive debts on their own. This has left a lot of the regional governments in

massive debts and will need the help of the central government to bail them out. Collectively, the required a

total 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 without

consulting the central government. During the times of economic boom, the borrowed heavily to lavishly

spend on new infrastructure and other projects. At the height of the boom, the regional governments enjoyed

a swell in tax revenue largely from immigrants who had come to work on the new housing projects. They

governments in the regions decided to spend lavishly infrastructural projects. But when the bubble burst, so

did the taxes stopped coming. They were then left with the fate of their finishing off the projects they had

already started or leave it to rot. To this effect they are left with only the option of having to rely on the central

government 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 of

the regions and especially Catalonia demanding complete financial autonomy from the central Spanish

government. 20

There are however a few regional government which are not deep in debts. The region of Madrid has been

able to manage their affairs without needing a bailout from the central government. It has already covered all

its refinancing needs for the year. Other regions like Navarra, Galicia, Cantabria, Aragon and the Basque

Country have all managed to keep balanced book. 21

19 http://www.icbc.com.cn/icbc/investment/financial%20news/Level%20of%20Toxic%20Debts%20in%20Spanish%20Banks%20Reach%2017Year%20High.htm 20 http://www.creditwritedowns.com/2012/07/spanish-regional-government-debt.html 21 http://www.bbc.co.uk/news/business-18951575

Through the time of economic prosperity, the country’s GDP ratio was declining even though the economy

was 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 ration

and seeking for relevant proof before giving out loans to those seeking loan facilities. However when the

housing bubble started, they became less stringent, forgoing their long held tradition of adequate checkup

before giving out loans. They almost gave out money to anyone willing to buy a property. To put this in

perspective, 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.22Commercial

banks (Santander, BBVA) are big and have numerous branches all across the country. They gave out short term

credit facilities to the private sectors. The savings banks, known as “caja” on the other hand specializes in

savings deposits and giving out loans. 23

The Cajas are somewhat like mutual banks which could be found in every corner of Spain with one bank for

almost every 1,900 Spanish people. Until very recently, Cajas were very much left unregulated part of the

Spanish banking sector. Since they were unregulated, they became the bank of choice for most developers as

well as people willing to buy a home during the housing market boom. 24They took full advantage of the

situation to give out loans and when the housing bubble wen burst, they were left with very large unpaid

loans. This allowed them to own about 56% of all housing mortgages in Spain. During the property, the banks

had a run of growth with the housing market boom. Another major problem is the banks took the loans to

lend to lender under a very risky scheme where they used the deposits of savers as deposits. 25

Just 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 to

sell houses for half the original price after the bubble. 27 By the middle of 2012, the value of the Spanish

property markets had fallen by almost 13%. This is the biggest drop in value since 2007. This sharp drop

further deepens the Spanish economy’s woes as it will be even more difficult for the economy to bounce back

to its former state. 28

22 http://www.mongabay.com/history/spain/spain-banking.html 23 http://www.guardian.co.uk/world/2012/jun/08/spain-savings-banks-corruption 24 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-17549970 26 http://www.thisismoney.co.uk/money/mortgageshome/article-2159303/Spanish-house-prices-drop-13-year.html 27 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.html

In comparison to their savings banks counterparts, commercial banks such as Santander and BBVA are doing

fairly well. This is because they say they saw the bubble of the housing market was not going to last and thus

made arrangements that will safeguard their future.

Spanish banks has become of major concern to the Eurozone because a large part of what they owe belongs

to other European banks and so therefore, their inability to bounce back will end out having rippling effect on

other countries and banks within the region. The recession and the slow growth pace of the Spanish economy

has made it even more difficult for the banks to be able to turn around their fortunes.

Measures taken so far

For the Spanish economy to bounce back a lot of work has be done to restructure the whole economy

especially the banking sector. The Spanish government has already initiated measures to ensure than banks

especially the savings banks are more transparent in the way they do business. This has prompted state

prosecuted 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 the

pension scheme which will raise the retirement age from 65 to 67, set out spending ceilings for different

government agencies.

The Spanish government has also promised to institute a wide variety of reforms and outing in a place

austerity 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 for

investor confidence, something will need if they want to reduce the massive unemployment problem in the

country. 30

The banking sector has received a different bailout packages from the government and the European

Commission. They banks receive another €37 billion bailout from the European stability Mechanism. In return

they promised to restructure their banking sector by laying off 28% of their employees and closing some of

their offices.

Another restructuring effort from the government is to create a so-called Bad bank where they will be able to

transfer all the toxic assets for the struggling banks. 31The difficulty here is it will be taking in its stride assets

that have very weak demand.

The European Union and IMF has also made a couple of their own recommendations that will help get the

country back on track. This includes broadening the tax net so that more business and people pay the

appropriate 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. 32

29 http://www.eurointelligence.com/eurointelligence-news/news/singleview/article/prosecutor-launches-criminal-investigation-against-bank-of-spain.html?L=0&cHash=1a968e25a553260fb15d0a17aef646a8 30 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=3067434 32 http://www.bloomberg.com/news/2012-09-25/spain-pledges-more-reforms-factbox-of-steps-taken-and-pending.html

Conclusion

Without doubt, the contribution of the Spanish banks to their nation’s sovereign is enormous. While the

central government exercised prudence in spending banks and local government were borrowing and

spending 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 exist

thing Europe. Not having a common fiscal policy shows how difficult it will be for the European Union to keep

the spending of member countries in check. The issues of disparity in develop between less developed

Sothern European countries and their more developed Northern European counties ought to have been taken

into account during the initial states of the Euro. The southern counterparts can just not keep pace with their

Northern counterparts due to different economics dynamics that exists between them.

Before the burst if the housing market bubble, Spain's economy high on the rise largely heralded as an economic success. But even then it was evident that the success will not be long lived. Spanish regional banks took full advantage of the situation are now been left with billions of toxic assets which has to be paid for with the help of the EU and Spanish government. The interesting thing is how Spanish Cajas who have been so conservative in the way they gave out loans because so overwhelmed that they gave out on the old tradition of making proper background check of potential customers to ensure their credit worthiness. The Spanish government for its part completely neglected the situation without taking any serious measures to ensure that 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 build housing 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 problems

caused by the Spain’s sovereign debt crisis. The government has slashed down on its public spending and have

becoming more stringent on banks that they are helping to bail out. The banks excised a lot of poor judgment

in lending money out freely without doing due diligence of prospective borrowers. As banks they are

supposed to exercise good judgment and ensure that they only give out money to people who are credit

worthy.

Regional governments and the banks ought to have known that the housing boom was not going to be

sustainable in the long term. Building housing property in areas where there were no social amenities was

only 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 problem

occurred and how best to solve them if they do happen in future. I remains to be seen how Spanish banks will

be 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 the

strength of their economies, budgets deficits and other key performance indicators through mechanisms such

as the Stability and Growth Pact. Banks had to be properly regulated on how they acquire and invest money

not just by regulatory bodies but by other bodies from the EU which will ensure that they do not go back to

the situation that created the debt crisis in the first place. These major challenges that countries within the

region are facing will act as litmus test for the future of the EU. It will give them the opportunity to face

difficult situations and make difficult decisions.

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role of spanish banks in spain’s debt crisis

Economy & Finance

spanish debt problem

spanish savings banks

ailing banks

european union

irish banks

europe akin

european countries

unemployment problem