Spanish depositors flee, stoking fears of full bailout
Private depositors flee Spanish banks and Catalonia seeks a 5bn euro rescue, heightening fears of a full country bailout.
European Central Bank figures show Spaniards withdrew one euro for every 20 euros deposited in July. In total, 74bn euros was withdrawn in July – the biggest monthly drop since the launch of the single currency. Total deposits were 1.5tr euros at the end of July, down 4.6 per cent from June and reflecting levels seen as the Greek contagion spread.
The figures came on the back of additional bad news for Spain with statistics confirming the recession was worse than initially thought, with the economy shrinking at an annual rate of 1.3 per cent in the second quarter.
“With much more fiscal austerity in the pipeline and unemployment at astronomic highs, the risks are clearly tilted towards a more protracted recession,” said Martin van Vliet, an economist at ING.
Some analysts believe it is inevitable that Spain will soon call for a European rescue package to bring down its debt costs as austerity measures push the economy deeper into recession.
“Deposit outflows are clearly picking up and the balance sheet of the Spanish banking system is contracting.” Barclays Capital’s Julian Callow said.
Follow the money
It is unclear how much of the loss is a capital flight to safe havens or banks outside the country. Spanish Economy Secretary Fernando Jimenez Latorre predicted worse economic figures to come by the end of 2012.
Catalonia yesterday said it was seeking a 5bn euro bailout from Madrid to pay its debts to the end of 2012. Catalonia, in north-east Spain, has agreed to cut its deficit to 1.5 per cent of gross domestic product but it has not agreed to give up any regional powers.
It is one of half a dozen regional governments shut out of markets and needing government help to roll over debt and fund budget deficits. Regions have a combined debt of 145bn euros, with 36bn euros needing to be refinanced this year.
Prime Minister Mariano Rajoy has repeatedly said he needs more information from the ECB before he can decide whether to ask for a full rescue package.
Some analysts believe Spain may formally ask for a additional financing in mid-September to October. Spanish banks have already received 100bn euros in aid. Jennifer McKeown from Capital Economics said it is clear that the ECB’s 1tr euro blitz of cheap lending to banks over the winter has failed to kick-start private lending.
Portugal, Greek woes
Portugal’s tax revenues fell 3.5 per cent in July despite higher tax rates, raising concerns that the country is tipping into a contraction spiral. It is now certain that Portugal will fail to meet this year’s deficit target of 4.5 per cent of GDP under its 78bn euro rescue from the European Union and International Monetary Fund, Morgan Stanley predicted Portugal would need a second bail-out in the autumn.
Greece said it plans to launch Chinese-style economic zones with special tax and regulatory breaks to attract foreign investment, but it is unclear whether that would breach the EU free market rules
The downturn in the Spanish economy is deeper than previously thought and accelerating, warned Robert O’Daly of the Economist Intelligence Unit. Unemployment is already at 25 per cent but the speed at which jobs are disappearing quickened to an average rate of 800,000 jobs a year in the second quarter.