Spanish stress test

Crisis-hit Spain is facing a fall of brutal cuts. The government has announced a new austerity package despite protests. Now it's become clear how much help the banks actually need.

In times of emergency, people will grasp at any straw. That's why the fact that most of Spain's major banks passed their stress tests has been celebrated as good news. The test was conducted by a management consultancy and commissioned by the Spanish Economy Ministry and central bank.

The stress test was meant to establish what kind and how much help the ailing financial institutions needed. The test is also one of the preconditions for the 100 billion euro ($129 billion) ESM-backed bailout package that was agreed with the European Union in July.

Now, after months of tense speculation while the tests were carried out, it has emerged that the banks do not need the whole sum, but a financial injection of around 60 billion euros. As expected, the Bankia Group is in particular need of help. Spain's fourth-biggest financial institution reportedly needs some 24 billion euros.

The banks that will be able to withstand the crisis under their own steam include Santander, BBVA and La Caixa, the stress test showed. This too is no surprise, said Daniel Gros, director of Brussels think tank Center for European Policy Studies (CEPS).

"We knew in advance that the large internationally active banks would have a problem with their domestic business, but will earn enough elsewhere - abroad - to balance that out," he told DW.

Crisis symptoms

The bank bailout is burdened with the hope that the recapitalized financial institutions will finally offer loans to companies for necessary investments and so put the economy back on track.

But Stefan Schneider of DB Research, Deutsche Bank's macroeconomic research group, said he has his doubts that the plan will come off. He argued it was doubtful that increased credit would lead to increased demand. Schneider pointed out that one symptom of the Spanish crisis is that both the private sector and public coffers are highly indebted - altogether, they owe more than 200 percent of gross domestic product.

"The tendency to take up new loans is likely to be very limited for the foreseeable future," Schneider told DW, adding that it was unlikely that the Spanish economy would suddenly shift into gear again because of a massive distribution of credit.An actual bank bailout is still a long way off and a number of conditions still need to be met before the ESM can write a check. The ESM, for its part, still needs to be founded before it can respond to calls for assistance - a step that is likely to be finished at the end of October. There is also still no centralized European oversight of the banking sector, as called for at a European Union summit at the end of June. EU regulation of the banks will likely start in January at the earliest, and it's still unclear exactly what steps the regulators will be able to take. While Spain would like to get the money with no strings attached, other countries, including Germany, have called for recipients to be kept on a short leash.

A run on banks

Recent press reports suggested that the government in Madrid is considering using loans intended for the banking sector to fill other holes. Economy Minister Luis de Guindos quickly denied the reports saying any ESM aid, which could total up to 100 billion euros, would be for banks only. Officials in Madrid said they are not willing to cede any independence or sovereignty to Brussels. But as discussions about the state of the Spanish economy continue, Spaniards have been emptying their savings accounts in record numbers fearing their banks may go bankrupt.In addition to the banks, the entire country has also been forced to undergo a stress test. On Thursday, the government announced the additional cuts that would be made as part of its proposed 2013 budget. Despite large protests by the opposition, unions and a large portion of the population, the draft budget calls for slashing 40 billion euros next year. Measures include freezing civil servants salaries for the third year in a row and it seems only pensions won't be put on the chopping block.

Similarities to German reforms

Further protests will not be able to change the austerity program, according to Gros. He said he sees similarities to a set of contested labor market reforms introduced by Germany in 2003/04.

"At the time there were major protests," Gros said of the so-called Agenda 2010 reforms that cut social services. "But it was clear to everyone that there was no other path to take."

The situation in Spain is, however, more dramatic than in Germany at the beginning of the decade as Spain's social expenditures are much higher than even just a few years ago.Introducing the fifth set of cuts, Prime Minister Mariano Rajoy wants to get the deficit under 3 percent by the end of 2013.

"It's the only thing Spain can still do," Gros said, adding that the country cannot refinance itself on the open market. Spain need "to regain the trust of its partners and the market. That means cutting back its deficit."

Many in Spain are looking at an uncertain future as unemployment is nearly 25 percent, the highest in the European Union. Unemployment among those under 25 is nearly 50 percent and many young people are seeking their futures abroad.

Autonomous regions vs. central government

Meanwhile the list of autonomous regions in need of requesting the central government's support is getting longer. Castile-La Mancha will also request aid, as Catalonia, Valencia, Murcia and Andalusia already have. Madrid, however, has made its support dependent on strict restrictions, which have placed additional pressure on already tense relations between the regions and the national government.The regional parliament in Catalonia on Thursday called for a referendum to decide whether the region should declare independence from the rest of the country. In addition to having one of Spain's strongest economies, Catalonia also has one of the largest mountains of debt.

"It is always difficult to manage a state where the regions have a lot of influence," Gros said, adding that was also a reason "why Germany broke the stability pact's debt rules in 2003/04. At the time, the federal government could not control the states. Today in Spain it does not look any different."