7/31/2019 The Corralito Risk - Espaa

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7/31/2019 The Corralito Risk - Espaa

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Bad loans rose to an 18-year high of 8.4% in March. And with Spains economy expected to

contract this year and next (see chart), pressure will increase. The Institute of International

Finance estimates Spanish banks might need 50 billion to 60 billion of fresh capital,

equivalent to around 5% of GDP. Higher estimates go above 100 billion.

Spains sovereign debt is already under fierce pressure. Worries about the banking system,

unemployment and growth have pushed ten-year bond yields above 6%. This in turn makes

it prohibitively expensive to recapitalise the banks. Spains credibility has been dented by an

upward revision of last years budget deficit, from 8.5% of GDP to 8.9%. Big-spending

regional governments were to blame. They must now find huge savings. Mariano Rajoy, theprime minister, is committed to a fiscal adjustment worth 5.9% of GDP in just two years. If

carried out, this will deepen the recession. Is there no end to Spains pain?