Belén Romana merely has to step out of her office and into the street to be reminded of the battle she is waging. Outside, at the end of Madrid's Paseo de la Castellana, the two slanted office towers owned by the Bankia conglomerate jut into the sky. They have become a symbol of the crash in the Spanish real estate and savings bank sector -- as well as of the entire country's dire problems. Romana's job is to dispose of the remains. She is the head of Sareb, a so-called bad bank onto which eight Spanish lenders were allowed to unload more than €30 billion ($40 billion) in real estate and loans last winter. This toxic legacy of debt is supposed to be paid off over the next 15 years.
The reorganization of Spain's financial sector is seen as the most important part of the reforms introduced by conservative Prime Minister Mariano Rajoy to overcome his country's economic and debt crises. But whether the plan will succeed remains uncertain, as real estate prices continue to slide amid continued concerns over the country's financial institutions.
There are also growing doubts about Rajoy's abilities as a crisis manager. A corruption scandal surrounding Luis Bárcenas, the former treasurer of the governing People's Party party, is a reminder to Spaniards of how a group of political and economic elites has taken the country to the brink of ruin. Bárcenas has admitted to maintaining a network of illicit accounts filled with money from various individuals, including developers, who made substantial donations to the party and its officials in return for lucrative contracts.
It was this climate that allowed real estate prices to become more and more inflated. But now the past is also catching up to Rajoy. "Chin up!" and "Stay strong!" he allegedly wrote in text messages to the man in charge of the illicit accounts, even long after Bárcenas' intrigues had been exposed. Political commentators in Madrid are beginning to question the strength of Rajoy, who is scheduled to appear before parliament this week to face questions over the corruption scandal.
At any rate, crisis management is not getting any easier for Rajoy. Only about 30 percent of the electorate still supports his government's policies. Although there have been some successes, a number of reforms have been ill-conceived and only exacerbated societal divisions. Unemployment stands at 27 percent, and 2 million Spaniards get their meals from soup kitchens operated by social welfare organizations.
"Spain has three core problems," says Clemens Fuest, head of the Center for European Economic Research (ZEW) in the western German city of Mannheim, "the extremely overinflated construction and real estate sector, the ailing banks and rapidly growing government debt."
All three problems are closely related. Public debt is growing because the economy isn't gaining momentum. This can be partially attributed to the fact that the banks aren't lending enough money because they are still struggling with consequences of the precipitous end of the construction boom.
A Precarious Position for Banks
Under these conditions, the expectations placed on Belén Romana are very high. The economist, who is seen as a miracle weapon of sorts, is a confidante of Minister of Economy Luis de Guindos and was a potential candidate for various top EU posts before she took over the helm at Sareb.
As the president of a bad bank, she prefers to keep a low profile. Sareb is one instrument to restructure the financial sector and reinvigorate the economy, but not the only one, Romana says. But the bad bank could also make the problems even worse. If Romana sells the old debt for too little, it would probably push real estate prices even lower and generate new losses for the banks. This leads her to downplay her influence. "We don't move the markets," she says.
But experts view things differently. "Sareb exerts a great deal of influence on prices in the real estate market," says Pablo Campos of the management consulting firm Oliver Wyman. For this reason, he explains, the bad bank will "do everything in its power to ensure that the first major sale is a success, so as to avoid sending a negative signal to the market." In the near future, Sareb hopes to successfully pull off "Project Bull," a deal involving up to 1,000 condominiums in the southern region of Andalusia and around the eastern city of Valencia.
The pressure to succeed has been growing since the International Monetary Fund (IMF) accused Sareb of taking too optimistic a view of price trends in the housing market. Now the entire selling strategy may have to be revised. "It's possible that Sareb will lose money in the first year," Romana concedes. "But there will be enough capital." Still, what happens when the truly difficult cases come up for sale?
It's hard to say how great the risks accumulated within the bad bank are. Since it is formally not a bank, Sareb is not subject to banking regulations. Taxpayers are also likely to be chagrined that Sareb gave financial institutions short-term bonds, primarily at attractive interest rates and guaranteed by the state, in return for their hard-to-sell assets. What's more, banks and investors are the majority shareholders of the bad bank, which, for the government, has the appeal that Sareb's debts do not appear on its balance sheets. But the IMF is concerned that this construct holds potential conflicts of interest for the private owners.
No matter how much the government has bent over backwards to unburden the banks, they are still at risk. Two years of recession have wreaked havoc on Spanish companies, and the number of loan defaults is steadily rising. "If the country remains in recession for another year, more banks will be in trouble," says Federico Steinberg, an economist at the Real Instituto Elcano (RIE), in Madrid.
Although the banks have been stabilized for the moment, Steinberg says, they are providing the economy with too little credit. And although they can borrow unlimited amounts of money at extremely low interest rates from the European Central Bank (ECB), "the aid from the ECB doesn't reach companies and households," says Paloma López. "It only helps the banks."
Optimism amid a Sea of Troubles
López is part of the leadership of the CCOO trade union. In her simple office on the edge of downtown Madrid, the energetic woman is settling scores with crisis management. The government knows about nothing but austerity, she says. By strangling demand, it has only prolonged the crisis. In her view, labor market reforms have failed to address the core of the problem: the concentration of the economy in the construction and real estate sector. "You can't export houses," López dryly notes.
Still, Spain is in a better position to overcome the crisis than neighboring Portugal. The country is the home of international corporations. The telecommunications company Telefónica is currently attempting to take over German mobile wireless provider E-Plus. The construction company ACS has purchased a majority stake in the German construction giant Hochtief, and the Santander Group of banks is reportedly interested in Commerzbank, Germany's second-largest bank.
But Telefónica and ACS are also battling large debts and, what's more, these companies make up only a small segment of the Spanish economy. "Spain's export industry is as competitive as Germany's," says Steinberg, the RIE economist. "But it is made up of fewer large companies." In his view, the country lacks an effective policy to make the many smaller companies more competitive.
The reforms are often short on detail, resulting in a lack of coordination among various measures. For example, the government had hoped to boost labor market flexibility by relaxing protections against dismissal. But Spanish workers are also not mobile because there are so few affordable rental apartments. And as they try to reorganize their finances, many municipalities are even selling off low-income housing units, which only exacerbates the problem.
Sometimes the government's reforms are so half-baked that the courts turn around and invalidate them. In the spring, the European Court of Justice determined that Spanish eviction cases violated EU law, prompting the government to try to remedy the situation. But in doing so, it set such short deadlines for appealing eviction decisions that lawyers for the affected challenged the new regulations, as well.
"The law is unconstitutional," says Edurne Irigoyen, who fights for the rights of the citizens affected by the evictions. The austerity policy and reforms mostly affect the poorest of the poor, she continues, while tax evaders are left unharmed and corruption still goes unpunished.
Even the European Commission, which mandated the reforms, criticized poverty and social marginalization in a recent report. "The impact and acceptance of the reforms could increase if the government would save less on education and health, for example, and give targeted incentives for demand," says Steinberg, the RIE economist. Spain is significantly below the EU average when it comes to investments in education.
Despite all the deficiencies, officials at the Ministry of Economics are optimistic. "The worst is behind us," says State Secretary Fernando Jiménez Latorre. He expects Spain to escape the recession in the second half of this year, even though the economy shrank by 0.1 percent in the second quarter.
In any case, what is still growing is debt. In Spain and the entire euro zone, it reached a new high last week. At 88 percent of GDP, the Spanish debt ratio is admittedly only somewhat higher than Germany's. But Belgium and Ireland are still the only other EU countries where the national debt has recently grown more quickly.