Tuesday, June 15, 2010

Spanish officials acknowledged that the country's banks and companies are having difficulty finding credit, underscoring the pressure Madrid faces to pursue deep structural changes to win back investor confidence.

Investors are particularly concerned that Spain would be unable to supply its banks with more capital, if needed, without emergency aid from the European Union and the International Monetary Fund.

Spain has been scrambling in recent weeks to convince markets that it can repair both its ballooning deficit and its troubled banking sector. Spain's Socialist government plans on Wednesday to begin pushing through a controversial labor-market overhaul that seeks to address a problem that many economists say is at the heart of Europe's economic malaise: rigid labor markets that dissuade companies from investing.

One big worry has been the increasing difficulty Spanish banks have faced borrowing from other banks in the so-called interbank lending market, an important source of funding that banks rely on for short-term liquidity needs. Spanish banks—including its savings banks, or cajas—have suffered massive losses amid a steep downturn in the country's real-estate market.

Spanish officials have largely been quiet on the issue but on Monday Treasury Secretary Carlos Ocaña, speaking at an economics conference, said tightness of credit for Spain "is a problem."
"Obviously we do need for the markets to loosen," he added.

At the same conference, Francisco González, chairman of Banco Bilbao Vizcaya Argentaria SA, the country's second-largest bank, said credit markets remain "closed" for many companies and urged the country to accelerate the pending reforms. "It's a priority that we restore market confidence," he said.

German Chancellor Angela Merkel, responding to speculation that Spain may be forced to follow Greece in seeking aid from the EU and the IMF, said late Monday that Spain could tap the EU's rescue fund if necessary. "If there should be problems—and we shouldn't talk them up—the mechanism can be activated at any time," Ms. Merkel said at a joint news conference with French President Nicolas Sarkozy in Berlin.
UPDATE. 9 Reasons Why Spain Is A Dead Economy Walking. Also, this at Marginal Revolution.