LINKED AT THE WALLET: The financial fortunes of the Spanish government and its banks are closely tied, and both are now struggling for survival.
THE BACKGROUND: The Spanish economy, the fourth-largest among the 17 countries that use the euro, is suffering from a real estate bust that has devastated banks and families. Unemployment is nearly 25 percent and the economy is forecast to shrink 1.7 percent in 2012. At the request of the Spanish government, euro countries offered up to €100 billion ($125 billion) in rescue loans for Spanish banks.
THE OUTLOOK: Spanish banks plan to pay back the loans with interest, but the Spanish government is on the hook if they cannot. In effect, the bank loans will be treated as government debt. One group of investors that isn’t shying away from Spanish government bonds is Spain’s banks. “It is as if the government were buying its own debt,” says Alejandro Varela of Renta4, a Madrid-based brokerage.
