The ′tragedy′ of Spain′s banking sector | Europe| News and current affairs from around the continent | DW | 05.06.2012
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The 'tragedy' of Spain's banking sector

Doubts that Spain can solve its banking sector problems on its own are growing. In an interview with DW, economist Guntram Wolff called the situation a "tragedy," but said the worst could still be prevented.

A woman uses an ATM cash point machine at a branch of the Bankia bank in Madrid, Friday, May 18, 2012. Shares in Bankia, SA, a recently nationalized bank that is heavily laden with toxic assets _ shot back up 24 percent after losing 14 percent Thursday in a session in which they had plummeted as much as 27 percent on a media report that depositors had withdrawn euros1 billion in the week since the state took over. Logo says ' Welcome to Bankia'. (Foto:Daniel Ochoa de Olza/AP/dapd)

Spanien Bank Wirtschaft Sprarer holen Geld ab Geldautomat in Madrid

DW: according to media reports, German Chancellor Angela Merkel wants to push the Spanish government to take assistance from the European Financial Stability Facility (EFSF). Would this be an advisable move for Spain?

Guntram Wolff: Spain has massive problems in its banking sector. The banks' books show many, many bad loans. The most important thing is that Spain takes these problems very seriously and is looking closely at just how large the losses are. If they are not so much, then Spain will be able to shoulder the burden and will not need aid from the EFSF. But if the losses are much greater - the exact figures have not been published - then it would certainly be wise to utilize European resources. It would also certainly be wise to invite European experts to Spain to help make the process more objective and transparent.

German Chancellor Merkel and Spanish Prime Minister Rajoy

Merkel (r) is worried about whether Rajoy can control the situation

Experts expect Spain would need a substantial sum to stabilize the sector - that would speak in favor of utilizing help from the EFSF. Is it right then that Merkel wants to increase pressure on Spain?

Ms. Merkel is absolutely right to say that what we've been witnessing in Spain these past few weeks has been a real drama. A Spanish tragedy, so to speak. We see a very, very big economy that, for various reasons, has not managed to solve its banking problems - although, in terms of scale, they were surely solvable for the Spanish government. The consequence is that we've lost faith in the capabilities of the Spanish government, and actually, of the entire Spanish system. So that's why I think it's good that Chancellor Merkel is saying: "You can't solve these problems only on your own" because a Spanish problem will end up becoming a German one at some point.

The Spanish government is aiming to have possible EU aid directly funneled to the banks, without involving the state. EU rules currently prohibit that. Why does the Spanish government want to stay out of it, and prefer direct aid for the banks?

Guntram Wolff

Guntram Wolff says Spain must accept more control from outside

People are afraid that Spain will become stigmatized if it asks for help from Europe. It could end up with problems in financing its deficits. In that sense, it would be better for Spain if the banks received direct aid. The problem is that one would have to clearly outline responsibilities. One cannot expect Germany and its European partners to make financial aid available to the banks, without having some way of keeping them in check. That's why the EFSF was created: it loans money only to governments because, through them, one can then impose certain stipulations for the banking systems. With the so-called "European banking union," which is being so widely discussed at the moment, direct aid to the banks would be coupled with monitoring of the relevant member state. Aid and control always go hand-in-hand.

But that's precisely what Spain fears: European control.

Exactly. It's difficult for any country to give up control and sovereignty.

German Chancellor Merkel isn't the only one worried about the euro due to the crisis in Spain's banking sector. Many experts also fear that the financial crisis could once again intensify and plunge the European economy into ruin. Is this fear justified?

The situation is pretty critical. There's a risk that Greece will have to exit the eurozone. Should that happen, there will be massive contagion effects. There will be an even greater flight of capital from other countries than we have right now, and then it will become difficult to maintain the eurozone's integrity. At the moment, there are still instruments to safeguard the situation, but the amount of stress and the risk is great. For that reason, I share the fear that the situation in Spain - should it get out of control - could massively impact the entire eurozone. We now have to act strongly and resolutely.

The optimistic statements from the Spanish government - that it has everything under control - sound rather empty and have done everything but ease the situation. What do you think Spain has to do in order to ease the markets and the political situation in the country?

The markets need clear signals as to how serious the problems are that we are talking about. That's why people have to be quite transparent, and - ideally - allow external auditors in and then publish the data without trying to make them look good.

Hasn't that happened up to now?

A hand written sign on an office window

Spaniards think 'the crisis should be paid for by the banks'

Spain is doing that, but there were some results that were dramatically corrected. That, of course, undermines the credibility of the other data. So the employment of a credible, external institution would make sense. For a really independent analysis, the European Central Bank or the International Monetary Fund, for instance, could view the account books and disclose the problems. If that's not done, then the problems will just be carried on and will help to further poison the situation in Spain politically and economically.

What do you mean precisely with "poison things economically"?

I think Spain's ailing banking system is one of the main reasons why Spanish companies, which are normally very strong in exporting, cannot continue to grow because they do not have access to the loans they need. Yet Spain needs companies to expand in order to propel growth and get the economy back on track.

Guntram Wolff is an economist and deputy director of the Brussels-based think tank Bruegel.

Interview: Ralf Bosen / als
Editor: Michael Lawton

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