As Juana García withdraws money from an ATM in Madrid, she has conflicting feelings about the country’s banks.
“They give the impression of being more stable than they were before. But we’re not seeing them give more credit to people to open businesses. The banks just take their bailout and off they go.”
The bailout she is talking about was a €100 billion emergency credit line which the government of Mariano Rajoy requested from the EU in June of 2012 in order to stabilise the struggling financial sector. Spain only used €41 billion of the money on offer and yesterday the country officially exited the rescue programme.
For EU commissioner for economic and monetary affairs Olli Rehn the rescue has been at least a partial success.
"The programme has worked," he told El País newspaper. "[But] if we took a panoramic photograph we would see light and shade."
One of the achievements Rehn will have had in mind is the fact that the rescue helped the Spanish government avoid following Ireland, Greece and Portugal in requesting a full sovereign bailout. In recent months market pressure on Spain has eased, giving it access to relatively cheap financing again.
Meanwhile, few would dispute the fact that Spain’s banking industry has changed substantially over the last two years.
In the spring of 2012 a fully-fledged financial disaster looked possible as the country's fourth largest lender, Bankia, ran into trouble. Like many of Spain's banks it had invested too heavily in the property bubble which burst in 2008. The government stepped in and part-nationalised Bankia, stabilising it with public funds.
Under the terms of the financial rescue Bankia and fellow nationalised lenders Novagalicia and Catalunya Banc had to rein in their wholesale activities and focus on more traditional retail banking. Heavy personnel and branch cuts were imposed on these banks as part of a wide-ranging attempt to streamline the financial industry.
“The two big positives from the bailout are that there haven’t been more big problems with other banks and that the government has fulfilled the conditions,” says Lluis Torrens, head of the IESE business school’s public-private sector research centre.
Bad situation
"We began the rescue in a very bad situation – the state was asking for help to save some very weak savings banks."
The exact status of Spain’s new-look financial sector should become apparent after EU stress tests scheduled for this year. But according to Manuel de la Rocha, an economist at the Fundación Alternativas, it’s clear that there has been an improvement, at least in general terms.
“There has been a restructuring of the sector in a firm and independent way,” he says. “The alternative was that many or some of these banks would have either been bankrupted or the government would have had to step in with further financing from the market at a very high cost.”
He also points to the successful establishment of Sareb, Spain's version of Nama, which is charged with managing the toxic assets which many banks took on during the property boom.
The merger of vulnerable savings banks, which has been encouraged by the terms of the rescue package, has led some observers to query the future competitiveness of the market: in 2009 there were 50 Spanish lenders, compared to 12 three years later.
Records began
But the more pressing concerns as Spain leaves behind its bailout lie in the area of credit. Last week the Bank of Spain revealed that the non-performing loan ratio of the financial sector had risen to 13.1 per cent in November, up from 11.4 percent a year earlier and the highest since records began half a century ago.
A new method of classifying loans contributed to that alarming figure, but so too did an unemployment rate of over 25 per cent. And while a two-year recession has now ended, the Spanish recovery is weak, with the IMF expecting growth of only 0.6 per cent this year.
The housing market has yet to see its own recovery. Property prices, which have already fallen by around a third since their 2007 peak, are yet to hit bottom as demand stays flat and a stock of 800,000 new homes remains empty.
“The mortgage market is suffering a downturn,” says Torrens. “As long as that market doesn’t pick up the housing stock isn’t going to drop substantially and prices will keep falling.”
There is a broad consensus that the banks, which have done so much to deleverage and fall into line with stricter requirements, are not lending enough – either to potential homeowners or businesses.
“This is a huge concern,” says de la Rocha. “This is a credit-based economy and there are lots of viable businesses which are going down because they can’t get financing.
“It’s always a difficult balancing act when you want to improve the situation of banks that have behaved badly. There’s an inherent tension: they’re being told to lend but also to be more transparent and to do things correctly.”
Credit to businesses fell 10 per cent in October to €1.080 trillion. Loans to households, meanwhile, have been on a steady decline since 2010.
The upshot of this is that while Spain’s lenders may offer vastly improved balance sheets, ordinary Spaniards are unimpressed, with polls showing banks are among the country’s least popular institutions.
But for the European authorities the emergence of the euro zone’s fourth largest economy from the dark days of 2012 is itself a triumph.
"The Spanish government's determined reform efforts and the people's readiness to accept temporary hardship for the sake of a sustainable recovery are exemplary," said Klaus Regling, head of the European Stability Mechanism, in December.
Yet the hardships Regling mentions have exacted a high cost.
Troika-sponsored budget cuts and the eviction by banks of thousands of homeowners who have failed to keep up mortgage payments have provoked an angry social backlash against the Rajoy government and the EU project.
Restoring public confidence in those institutions will be every bit as challenging as it has been to persuade Spaniards that their banks, while unwilling to lend, are again solid.
