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.
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The exact terms of a Spanish bank bailout still have to be negotiated, and the amount will depend on independent bank audits, including one from the International Monetary Fund which will be made public on June 11.Skip to next paragraph
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Most analysts put the cost of cleaning up the banking sector at between 80 and 100 billion euros, half of which would come from Europe’s bailout fund, but some estimates are twice as big. Whatever the amount, the government can’t raise the money through debt because it’s already running a deficit that will reach 5.3 percent of gross domestic product this year.
Most of the cash, around 23 billion euros, will go to recapitalize Bankia, which was the third-biggest bank in Spain a year ago, with strong ties to the ruling Popular Party. The government was forced to nationalize it on May 9 to preempt a broader bank run, should people have lost faith in the financial system. When the bank recast its 2011 results shortly after its seizure, the tiny profit it initially reported became an 3.3 billion euro loss.
On top of that, Spain’s central bank last week reported a record 100 billion euro capital flight in the first quarter of 2012, equivalent to about 10 percent of its gross domestic product. Stock markets also remain near decade lows as investors pull their money to reinvest elsewhere. It’s all but certain that cash flow out of Spain only worsened this quarter after Bankia’s seizure.
An issue of trust
Despite Bankia's seeming deception, the government blocked numerous attempts to investigate its collapse, undermining Spaniards' trust in their government to protect their interests.
“When we find out everything through the press, we lose our trust. I don’t even think we’ve hit rock bottom,” Mrs. Ramos said. “The government isn’t explaining what it’s doing. What the government has to do is come out and explain absolutely everything.”
With the threat of bank run apparently tamed, the bigger issue is confidence, analysts say. “There’s a limit if you don’t get political commitment,” HSBC’s Mrs. Henry said. “The ECB can address symptoms, like bank runs, but they can’t solve the problems. Solutions have to come from politicians.”
More than 90 percent of Spaniards say the economic situation is either bad or really bad, according to a survey released June 6 by the autonomous government polling institution Center of Sociological Investigations. Nearly 40 percent of Spaniards expect the economy to worsen in the next year.
According to the monthly poll, Spaniards in May identified the political class and political parties as their third most-pressing issue, after unemployment and the economy, significantly more than in December, when Prime Minister Mariano Rajoy came to power. Around 9 percent of people cited corruption and fraud, also a rising concern.
In fact, citizens are already taking things into their own hands. The 15M movement, the Spanish version of the global Occupy Movement, raised more than 20,000 euros via crowdfunding to cover legal fees for a class action suit against Bankia and its deposed chairman Rodrigo Rato, a former IMF director and deputy prime minister of Spain.
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They had targeted a 40-day period to raise 16,000 euros, but within 24 hours they had more than enough cash, as well as dozens of Bankia employees, stockholders, and account holders willing to testify against the bank in the upcoming hearing. Hours later, the government’s prosecutor office announced it had opened an official investigation into possible fraud in Bankia’s collapse, opening a second front.
Still, it’s impossible to say when or how people will regain trust in these institutions.
“Our mindset is strange in Spain,” says Pedro Alcalá, a 31-year-old unemployed insurance broker who was in a Bankia office paying interest on gold he pawned.
“We all live day by day, and unless we are drowning, we don’t do anything about it,” Mr. Alcalá says. “We criticize politicians, but when elections come we don’t change anything. Whether right or left, politicians are the same. We deserve what we are getting.”