Maeve Dineen: Decision not to guarantee banks might save Spain
AS Portugal prepares to go the way of Ireland and Greece, we may be in danger of missing the big picture: that Spain has somehow managed to not only survive the crisis so far but is slowly pulling away from it.
As the death of Liz Taylor at the ripe old age of 79 following a tumultuous life shows, it is possible to survive almost everything if you have the right mixture of luck and staying power.
Spain, which has both a fiscal and a banking crisis, is Liz Taylor in this convoluted analogy while Ireland is Jean Harlow, the platinum blonde sex symbol who died from renal failure at 26.
So why are we on the floor while Spain still manages to ride high? One reason is that Spain's public debt, less than two-thirds of GDP last year, is not especially large. Yet the markets fear that its government may, like Ireland's, have to find enormous sums to support the country's banks. But Spain did not guarantee its banks and socialise their debts. Neither did it create some variation of NAMA despite a property collapse every bit as damaging as our own.
Sure, there are still problems lurking inside the Spanish banking sector, especially the regional banks, which are like our credit unions on speed. Just as there are problems lurking inside Germany's regional banks.
Moody's downgraded 30 Spanish banks last week, citing a combination of pressure on the country's sovereign debt and declining market share of smaller banks as the financial sector consolidates -- but the largest banks such as Santander and La Caixa were left unchanged.
The country is also thought to be able to absorb even big real estate losses in its banking sector.
Analysts believe Spanish banks could need around €50bn to recover from those losses. The government thinks it will be half that -- either figure is relatively small compared to the size of the economy.
Interestingly, last week, Spanish banks and a state-backed electricity fund were able to borrow in the bond markets, in spite of the wider crisis. Spain's borrowing costs fell as Ireland's and Portugal's skyrocketed.
One of the key reasons was Spain's refusal to panic and offer a universal guarantee like we did. That means the Spanish state can still choose whether to save the banks and analysts are predicting that many smaller banks will be swallowed up rather than nationalised.
In other words, capitalism will be allowed to operate and do its work unhindered.
Meanwhile, the path to rehabilitation for us looks more difficult with every passing day and, at this stage, it is hard to see how we can escape without an eventual debt restructuring.
The Government will once again attempt to draw a line under the banks this week with the publication of the stress tests. But the figures look so grave that the ECB is on standby with yet another "fund" to ease market fears and prevent what deposits are left in our banks from flowing out of the country.
There seems to be no end to this euro crisis. Portugal is now on the brink of being bailed out and, judging by experience, once that happens, the hedge funds could swiftly move on to attack the Spanish markets. The lack of a reform package at last week's EU summit has left the markets in a spin.
While Spain has avoided many of the mistakes made by policymakers here, only time will tell whether it has really managed to turn the PIGS (Portugal, Ireland, Greece and Spain) into PIG.