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Few Good Options Available to Handle Spain Banking Crisis

Not content to let Greece steal all the headlines, Spain's economic woes prompted an emergency meeting of the Group of Seven (G7) finance ministers this week. While the meeting was ostensibly about the entire European Union crisis, the Spanish banking crisis was at the top of the agenda since it poses greater risks to the global economy and will ultimately involve more complex solutions.

Greece's troubles stem from the perennially spendthrift government's inability to meet its payment obligations, but Spain's stem from the fact that the country's banks are in severe crisis and in need of assistance that the government can't provide. Spain's banks were caught up in the same property rush that gripped the United States in the last decade, but the housing boom in Spain made the one in the U.S. look minor by comparison. "The prices of homes spiraled upwards in an uncontrolled speculative frenzy and led the whole economy down an unsustainable path," said NACM Economist Chris Kuehl, PhD. "The collapse was faster and more dramatic than it was in the United States and all those construction jobs seemed to vanish overnight. In a matter of months, the rate of joblessness surged to 25% and Spain was in financial crisis."

While banks in the U.S. softened the blow of the housing crisis with mortgage-backed securities, Spanish banks had no such risk mitigation tools in place. "Now these banks are woefully undercapitalized and desperately need rescuing," said Kuehl.

However, the solutions to the problem involve getting the investor community to buy Spanish bonds, a task much more easily said than done. Yields have risen to the same crisis point that provoked a rescue for Greece and Ireland, but there is no certainty that Spain will be eligible for the same sort of consideration, due mainly to one important detail: the euro zone is "essentially tapped out," as Kuehl put it.

"The only country with the wherewithal to help is Germany, but there is not enough that Germans could offer—even if they elected to do so," he added, noting that this dearth of bailout money has now become an issue for the G7. "The action needed is for these states to somehow guarantee the Spanish bonds so that the government can meet its fiscal obligations while working out some kind of rescue for their banks," said Kuehl. "This means that this collection of cash-strapped nations will be trying to cobble together a multi-billion dollar bailout for the Spanish and the Europeans in general. The options are just not very promising."

- Jacob Barron, CICP, NACM staff writer