The Spanish banking sector continues to struggle as the country attempts to balance its social problems with a desperate need to retain international credibility in the face of what many see as intractable financial issues.
Yesterday Banesto, a bank part-owned by giant Santander, revealed it had had a terrible first quarter. Net profits fell to €20m, a drop of 88 per cent. The lender blamed part of the fall on tough new regulations imposed by the government in response to property prices in freefall.
Spanish government debt is hovering perilously close to 6 per cent for 10-year bonds. Although the figure is of no technical importance, the psychological ramifications on traders can be great; many see it as the dividing line between a troubled and a doomed economy. The fact that banks struggle to raise capital from any other source also depresses their share prices and pushes up the price of government debt. Ending this dependency is one of the highest priorities of the government.
In a leader this morning, the Financial Times urges the prime minister, Mariano Rajoy, to make this priority explicit, writing  (£):
Many of Spain’s troubled banks are too small to bring down the whole system. Mr Rajoy should therefore consider telling bank bondholders that they cannot expect taxpayers to bail them out. It is a risky step, but one that may prove necessary to secure his country’s future.
The fear of a domino effect is what drives much of the Eurozone crisis, of course. Just as Spain feels that a collapsing bank may take down its whole system, so there is a concern that the EU cannot survive a Spanish, Portugese or Irish default. That latter fear appears to be abating, however. The IMF announced yesterday that the European "firewall" it is seeking to create – the pool of money raised to prevent financial contamination spreading – will be smaller than previously thought. Rather than raising $500bn, the Fund is now aiming for $400bn. Even so, reaching that target will require a fair amount of hustle from it's leader, Christine Lagarde.
In a speech in Washington, Lagarde said :
In today’s global economy, with its dazzling array of instant interconnections, a stronger European firewall can only ever be part of the solution. A stronger global firewall will help complete the “circle of protection” for every country.
Here, the IMF can help. But to be as effective as possible, we need to increase our resources.
The Fund needs to be able to stand behind all its members and meet the needs of all those affected by the crisis—those at the epicenter, and those who are bystanders.
We are, of course, continuously reassessing global risks, taking into account developments in the economic climate as well as all policy actions including by Europe. The needs now may not be quite as large as we had estimated earlier this year.
But, let us make no mistake: the risks and the needs are still sizeable, and it would be imprudent to think otherwise.
Back in Spain, the financial pressure is having ramifications beyond the mere political. The ruling People's Party has passed a number of new measures designed to clamp down on protest, sparking comparisons with the nation's former fascist dicatator General Franco. The Telegraph reports :
[The Spanish interior minister Jorge Fernandez] Diaz said "serious disturbances of public order and intent to organise violent demonstrations through means such as social networking" would carry the same penalty as involvement in a criminal organisation under the new reform.
But he also said that the measures would extend authorities powers to deal with passive resistance as contempt of court.
The measures will make it "an offence to breach authority using mass active or passive resistance against security forces and to include as a crime of assault any threatening or intimidating behaviour."