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Spain capital flight doubles as risk of European bailout rises (+video)

Capital flight from Spain has doubled to a new record and the country has demanded the European Central Bank recapitalize its teetering financial system, warning that the alternative is a broader bailout that could rock the European economy.

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Spain has not said how it intends to pay for the 24 billion euro recapitalization of Bankia it has already promised, which would cover about half the needs of the financial sector. The government proposed issuing more debt, but the EU and ECB balked at the idea and instead offered to give Spain an extra year to comply with an EU mandate to lower its deficit to 3 percent by 2014, down from a 2012 projection of 5.3 percent in exchange for more tax increases, more austerity and transparency, and more rapid implementation of reforms.

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About a quarter of Spain’s bank branches will eventually be closed, and 15 percent of its employees will be laid off, according to a research note from Spanish bank BBVA released yesterday.

Spain’s gamble

Germany and the ECB don’t seem inclined to accept any plan that would involve sharing the pain. Fiscal conservatives want Spain and Italy, the next in line for a systematic crisis, to cut their way out of this crisis.

Spain can hold out from requesting a bailout for some time, but not too much. It has already secured half of its cash requirements for the year and it has enough resources at its disposal to press its case.

“A bailout is not inexorable or unavoidable. The government wants the political convenience of capitalizing their banks at cheaper rates, and that is what is being discussed,” says Ruiz Scholtes.

But the EU is moving slowly on this and any help could be delayed for longer than the Spanish economy can survive. How long that is is anybody’s guess.

Talk of a Greek economic collapse often draws comments that Greece's economy is too peripheral to have huge consequences for the global economy, but the situation is very different when it comes to Spain. A Spanish collapse could be catastrophic. Europe does not have enough money in its bailout fund to rescue Spain if its economy collapses and economists, investors, and governments around the world are throwing out possible economic and political solutions in hopes of averting an unpredictable domino effect.

Germany and others are playing their part by demanding more reforms, “but they are aware they can’t tighten the noose too much or it can strangle Spain,” Ruiz Scholtes says. 

Italy yesterday also pressed Germany to speed up negotiations to integrate Europe’s financial systems, creating a united front with Spain. Some financial analysts say that Spain's financial crisis has prompted a debate on an issue that needs to be corrected – the lagging integration of EU economies.

“The encouraging part is the debate how to centralize decisions in some sort of EU banking supervision,” said Luigi Speranza, head of inflation economics in BNP Paribas, a French bank. “Any pool of resources must correspond to an agreement on some integration. You need to establish the rules. We have to find framework for financial support, more fiscal integration possible and acceptable. And the debate is over finding common ground.”

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