Reuters Students are protesting on Barcelona's elegant boulevards, public-sector wages are being cut for the second time in three years and resentment is growing against the central government and beneficiaries of bank bailouts. Such is the daily fallout from the euro zone's debt crisis. Like the rest of Spain, Barcelona is looking at several years of hard grind as the country adjusts to living within its means after the collapse of a debt-financed housing bubble that has brought much of the banking sector to its knees. Yet unless the most pessimistic projections of the cost of rescuing the banks prove right, the signs are that Spain faces corrosion not collapse. Greece risks suddenly not being able to pay for vital imports if it cannot form a new government that sticks to the terms of an international bailout. But Spain is more representative of the generally insidious, demoralising nature of the crisis: austerity is sapping trust in politicians across the euro zone and fraying the social fabric as the bills for years of economic mismanagement are shared out. “The problem is social. What are we going to do when we have 25 percent unemployment? It's dramatic,” said Joan Ramon Rovira, head of economic studies at the Barcelona chamber of commerce. Even though every fourth Spaniard is unemployed, job protection is being eroded. In Barcelona, capital of the northeastern region of Catalonia, hospital wards are being closed, class sizes are growing and university fees are rising. The result is a hardening of attitudes as various groups campaign to preserve their entitlements. The crisis has also ratcheted up political tensions with Madrid as supporters of Catalan independence increasingly begrudge helping to bankroll the central government, which they feel treats them with disdain. “Spain is a backpack that is too heavy for us to keep carrying. It's costing us our development,” said the spokesman for Catalan President Artur Mas, Joan Maria Pique. Rovira is optimistic that Spain will pull through. He produces figures showing how smartly exports are rising from Catalonia, which makes up 20 percent of the national economy and generates about 30 percent of its exports. Spain's exports rose 11 percent last year as it gradually restored the competitiveness lost when wages spurted after the launch of the euro in 1999. The government expects the current account deficit to shrink to under 1 percent of GDP this year from a peak of 10 percent in 2007. Joerg Kraemer, chief economist with Commerzbank in Frankfurt, estimated that Spain had recouped half of the pre-crisis deterioration in relative labor costs, a trend that should continue because of recent reforms making pay and contracts more flexible. The priority now, according to Catalonia's economy minister Andreu Mas-Colell is for firms in the region to bulk up. “The bright spot in our economy is exports,” he said in an interview. “But our firms are too small. In an export-oriented economy size is important. We are too fragmented.” In contrast to progress on external economic rebalancing, Spain is dragging its feet on reducing its budget deficit and is being punished by investors. Ten-year government bonds yield around 6 percent, a level that is unsustainable in the long run, on concerns that Madrid will have to spend tens of billions of euros to stop the rot in its banking system. Spanish banks have more than 180 billion euros of sour property assets on their books, and analysts fear there is worse to come as recession triggers more corporate and mortgage defaults. The Spanish government sought to boost investor confidence on Friday by ordering banks to set aside a further 30 billion euros in loan-loss provisions, two days after taking effective control of Bankia SA, one of the leading banks. But the financial markets were unimpressed. The attempted clean-up is the fourth, and Edward Hugh, an independent economist near Barcelona who says the government has been too slow to get to grips with the meltdown, doubts it will be the last. “The key question is where the price of property is going to settle. Until we know that, it's all guesswork,” he said. House prices have fallen about 25 percent since 2007 and a Reuters poll published on Friday pointed to a further decline of more than 15 percent in 2012-2013. Morgan Stanley's base case is that banks will need 25 billion euros in capital. Royal Bank of Scotland expects a 68 billion euro shortfall over the next three years. __
