Schroders: Spain in danger of a Northern Rock situation

Markets are waiting for an official request for help from the European Central Bank, and according to Keith Wade, chief economist at Schroders Spanish Prime Minister Mariano Rajoy (pictured) is playing a waiting game.

“Time is running out for Spain.  If you look at the banking system and the level of deposits in the Spanish banks you can see that they are starting to fall and that happened earlier in the Greek economy,” he warned.

Spain has now joined Greece on a negative sentiment on euro membership.

People in Greece began to believe that they might not be a member of the euro at some point in the future and started to take their money out of domestic banks and moved it into German or French banks, or into bunds. 

According to Wade, the same thing is now happening in Spain, where the danger is a run on their banks and potentially a Northern Rock situation in the Spanish banking system as a whole.

Meanwhile, the problems in the eurozone are likely to continue.

“Unemployment is at frighteningly high levels in places like Spain; it is up at a quarter, 25% of the population are unemployed and youth unemployment is 50%.  That to me is a failed economic policy,” Wade said.

These economies are trying to deflate their way out of a debt crisis so they keep tightening fiscal policy and trying to drive down inflation.

“Wages are falling in Spain and unemployment is still going up.  As wages fall so does demand. Nobody wants to buy anything; there is no demand in the economy and nobody wants to create jobs.  Economies can get stuck in a weak growth-high unemployment state – that was the Keynesian insight and that is what is being ignored in the Eurozone. We expect Spain to request a bailout before the end of the year,” the economist warned.

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