European leaders are debating steps that might stem the potential for “contagion” from Greece to hurt Spain. Ideas include larger common investment funds that could be used for job-generating infrastructure projects and jointly issued bonds that would allow weaker euro-zone nations to benefit from the stronger credit standing of nations such as Germany. The European Central Bank could restart its program of buying bonds of individual nations to help hold down interest rates, loan more money to banks as it did earlier this year, and take even more dramatic measures.
A European summit in June is expected to produce a “growth compact” to complement the austerity programs urged by Germany — and blamed by some economists for the onset of recession in Italy and Spain.
Recent news about the Spanish economy has not been encouraging. Data released from the national statistics agency and the Spanish central bank indicated a sharp drop in retail spending in March, a continued contraction in gross domestic product and, perhaps most worrisome, a slowdown in the country’s exports.
Spain’s export sector has been one of the few props of an economy that is registering 25 percent unemployment. The central bank’s monthly economic report, covering March, showed exports dropping 2.3 percent and demonstrated the corrosive dynamic at work in the euro region. Spain’s auto sector, once a major export strength, reported a particularly sharp slowdown in sales to the other struggling euro-zone nations of Italy and Portugal.
Meanwhile, the likely cost to the government of rescuing the country’s banking sector continues to rise. Some analysts estimate this could push Spain’s overall public debt to unsustainable levels. The government is in the process of nationalizing the Bankia conglomerate of savings banks, and last week it was revealed that the company would need tens of billions of dollars more than expected.
Spain’s government has ordered banks to set aside more money to account for troubled property-development loans, but it remains unclear whether those new provisions will be adequate as property prices continue falling and the economy remains in recession.
Unlike the United States and Ireland, where a quick recognition of bad loans helped banks recover faster, Spain has allowed the problem to linger for years after the crash of its property markets. The delay was based on hopes that an economic recovery would solve the problem and avoid an unpopular bank bailout.
A key architect of that policy, Bank of Spain Governor Miguel Fernandez Ordonez, announced Tuesday he would leave office a month early so the government could appoint his replacement and speed plans for a deeper overhaul of the country’s financial system.