On the verge of recession

The month of November is expected to be big time for the Spanish economy and Spain’s role in the international financial crisis. Spain’s buoyant economy is now on the verge of recession, after having shrunk by 0.2% in the third quarter of 2008, while savings banks across the nation announce intra-regional mergers that aim at mitigating the risk of bankruptcy of the handful of savings banks that have been experiencing soaring delinquency rates in the past few months.

The Bank of Spain announced last Friday what many had anticipated since the construction sector started to collapse at the beginning of the year. The economy shrank by 0.2% and is expected to continue its downward trend for the remainder of 2008 and 2009. Many advocate the economy will come back on track in 2010, an argument that is highly speculative at this point and is not based upon likely macroeconomic reform.

Unemployment continues to spike up in Spain, now standing above the 11% mark, the highest in the European Union. Unemployment rate is likely to surpass the 15% mark, almost doubling the record-low of 8% reached during the first Zapatero administration. The soaring numbers of foreigners that arrived to Spain looking for a job in the once upon a time booming real estate sector, are now adding thousands to the unemployment figures.

Increasing delinquency rates are forcing Regional Governments to announce intra-regional mergers. BBK and Kutxa, the two largest Savings Banks in the Basque Country announced their merger this week. The Popular Party of Castilla-Leon, the 9-province Region northwest of Madrid, announced a possible merger of the handful of regional Savings Banks, which include Caja Duero and Caja Espana. The latter is likely to be the first Savings Bank that goes bankrupt in view of its increasing mortgage delinquencies, the highest of any financial institution in Spain. This is why it is likely that Caja Espana gets absorbed by a counterparty in its same region. Provinces and regions control the appointment of the executive board of Savings Banks and decide upon mergers and acquisitions.

Last Spain is at this point unlikely to take part in the international financial summit announced by George W. Bush to take place in Washington DC on November 15, which member countries of the G20 will attend. Were Spain’s absence to materialize, Zapatero’s Administration and in particular Finance Minister Pedro Solbes and Foreign Affairs Minister Miguel Angel Moratinos, would score a failure which should have no repercussions vis a vis the stability of the current Administration, which controls 168 seats in a 350-seat parliament.

Spaniards in the meantime start to feel the economic burden of an increasing unemployment and declining economic conditions. As it so happens at a world’s level, a time of crisis is a time of reform, a unique environment that justifies public policies that are not always popular among the electorate. Jose Luis Rodriguez Zapatero should look forward and assume risks provided he is not likely to run for President in 2012. If he is not willing to assume the political cost reform would convey, Pedro Solbes, on the verge of retirement, should assume responsibility and absorb the political cost of a necessary reform. Last a more capable and prepared Minister of Labour should be appointed in times of economic turmoil and contraction.

Originally published at 5spaniards and reproduced here with the author’s permission.