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Spain's biggest hurdle to a bank recovery: public distrust

Key to averting a banking collapse in Spain is persuading the public it's safe to keep money in the country – but government actions only exacerbated a loss in confidence.

By Correspondent / June 8, 2012

Demonstrators shout slogans against bankers during a demonstration outside a Bankia bank branch in Barcelona, Spain, Friday, June 8.

Emilio Morenatti/AP

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Madrid

As Spain keeps the world economy on edge while it scrambles to recapitalize its once-mighty financial sector, it’s losing hold of perhaps its most important asset: citizens’ trust.

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"Too-big-to-fail” Spain appears to have averted a complete economic meltdown as Europe rushes to give it more time to recover. But rescuing the banks and averting a full-fledged embarrassing bailout is not enough. Central to Spain's ability to pull out of this crisis is corporate and public willingness to keep money and spending at home, instead of running to foreign banks and markets. And key to that, analysts say, is for the government to explain to Spaniards what went wrong, how the system will be fixed, and how those responsible will be held accountable – instead of stonewalling investigations.

Markets and global governments are concerned about a domino-effect bank run that could severely undermine the European Union financial system, as evidence mounts that Spaniards and investors alike are losing confidence in the country’s institutions, not just its banks.

“I’m really scared,” says Jesús Diaz, a young taxi driver. “If we have to ask Europe for a bailout, I’m pulling my money out because I don’t know if Spain will become Greece. I have my taxi and I’m not going anywhere, but my brother will leave Spain because he has a degree.”

Others know there is little refuge. “I’m not pulling my money out,” says Purificación Ramos, a museum employee. “Where will I put it? Today one bank goes under, and tomorrow it will be another. I can’t trust any of them.”

A Euro bank bailout

Mrs. Ramos is correct. A bank run is unlikely, for now, precisely because the consequences would be global. Europe does not have the money to rescue Spain, an almost-certain scenario if its financial sector implodes.

Paymaster Germany, under pressure from its European partners and other global powers, including the US and China, signaled this week that it is willing to accept a bailout limited to Spain’s banks (as opposed to the country, as was the case with Greece, Ireland, and Portugal). Spain can officially request a bailout this weekend, according to Spanish media and Reuters quoting unnamed sources today, although the government denied it had yet made a decision.

Spain’s plight is not over unsustainable debt levels or its unwillingness to implement the necessary reform to return to growth. The Spanish government already secured most of its credit obligations this year and a bond auction yesterday illustrated that investors are still interested in lending money to Spain, albeit at a higher interest rate.

Furthermore, the European Central Bank has enough firepower to preempt any Spanish bank collapse. “It is possible that people withdraw a lot of money, but banks with little collateral won’t go bust, because they could still go to the ECB,” said Janet Henry, London-based chief European economist with HSBC.

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