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Spain edges closer to full bailout


The Spanish are edging ever closer to requesting a full scale bailout after the country’s most economically important region, Catalonia, begged to be rescued by Madrid.

The news follows reports that Spanish citizens are withdrawing their cash from the banks at a record rate in eerily similar scenes to those seen in Greece as its crisis escalated. Data from the European Central Bank has shown that outflows from Spanish high-street banks reached €74billion (£59bn) in July, twice the previous monthly record.

Julian Callow from Barclays Capital said the deposit loss is €65bn even when adjusted for the tax season: “This is highly significant. Deposit outflows are clearly picking up and the balance sheet of the Spanish banking system is contracting.” Economy secretary Fernando Jimenez Latorre said Spain is in the eye of the storm right now with the “worst falls” in economic output yet to come in the second half of the year.

More worryingly for Spain’s government is the fact that the north-eastern region of Catalonia, which represents a fifth of the country’s economy, has gone cap in hand to Madrid begging for a €5 billion rescue bailout from the central government. The Catalan government is angry with Madrid for allowing the country to slip into its current state and feels that the government is devolving the pain of austerity onto other regions.
“The money that we are asking for is our own Catalan money that is being administered by the Spanish government,” said a spokesman, reflecting angry feelings in Barcelona that Madrid is devolving the pain of austerity on to the regions.

With regional governments feeling the full force of the tough austerity measures some fear that Spain could become divided as regions blame others for the nation’s plight. Catalonia does not have control of its tax revenues unlike other regions such as the Basques who do. Comparatively the Basque regions have fared a lot better than other parts of Spain due to their autonomy, a fact that is sure not to be missed by other regional governments.

European Council President Herman Van Rompuy has said that it is up to Spain to decide whether it should apply for further aid. Spanish PM Mariano Rajoy replied that he needed more details from the ECB to help him decide. To observers the decision is obvious. Spain is suffering from record high unemployment, civil unrest and the threat of division thanks to its debt crisis. Should the Spanish government refuse aid in an attempt to save face? The answer is a resounding NO.

The Spanish people are suffering terribly and anything that could relieve the pressure would surely be welcome. The other side of the coin of course, is that if Spain takes the money then it will be treated just as harshly as Greece and Portugal, two nations that took the bailout but continue to sink ever deeper into debt and economic ruin.

“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.

He expected Spain to formally request additional external financing in mid-September or October. Spain has already negotiated up to 100 billion Euros in aid for its ailing banks.