Spaniards Withdraw Money Over Bank Failure Fears

Any rescue of Spain's banking system could exceed the cost of Greece's total bailout. That has investors worried, after Madrid was forced to nationalize its largest real estate lender. The previous government's strategy was to force mergers among the small banks, to try to combine assets and strengthen them against debts. But what has resulted is simply bigger banks with bigger debts.

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ROBERT SIEGEL, HOST:

It's ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel. Several Spanish banks have had their credit ratings downgraded to junk status today, among them the country's largest real estate lender, Bankia. Its shares were also frozen from trading today while officials negotiate a state bailout for the company.

Investors fear that Spanish banks in general, which are weighed down by bad real estate loans, could bankrupt the country. As Lauren Frayer reports from Madrid, depositors are beginning to wonder if their money is safe, and the markets now fear a run on Spanish banks.

LAUREN FRAYER, BYLINE: Lately every time Pablo Sanchez gets money at his local ATM machine, he wonders if he should just withdraw it all.

PABLO SANCHEZ: I get more fear because I don't know what's going to happen, you know.

FRAYER: The store where Sanchez works does direct deposit into his local caja, a type of community bank unique to Spain. They take local money and invest it in the local community with supervision from local politicians. But after Spain's housing boom and bust, the cajas have become the weakest link here. The biggest caja, Bankia, is being nationalized, and Sanchez now wonders whether he should move his money out of the country.

SANCHEZ: I'm just worried about any money in cajas or banks or anything, you know.

FRAYER: Such fears can sabotage the system. Shares in Bankia temporarily lost nearly a third of their value recently, after false reports of a run on the bank. The breakdown of Spain's community banking system has come as a shock to many here.

GONZALO GARLAND: Some years ago, we were being told that it was the best system in the world, and now suddenly it's like on the brink of intervention.

FRAYER: Economist Gonzalo Garland at Madrid's IE Business School says the cajas were a good idea, at least in theory.

GARLAND: When we give our money to a region, and then this caja uses all the profits in order to create some development in our own particular region, so the intention is very good. The problem there is people were (unintelligible) in those positions, earning a lot of money, and we're seeing some of those cases now, and retiring with huge bonuses, which is public money at the end of the day.

FRAYER: Politicians lent to their friends; corruption got out of control. On top of that, when Spain's housing and job markets collapsed, the cajas were hit hardest because they're not diversified like national or global banks. The previous socialist government's strategy was to force small cajas to merge, combining assets to try to strengthen them against losses.

But what you have now is basically bigger banks with bigger debts, like Bankia, the result of several cajas that came together in 2010. Negotiations are underway to determine just how much taxpayers' money, likely tens of billions of dollars, will be pumped into Bankia.

GAIL ALLARD: We know Bankia wasn't in good shape.

FRAYER: Economist Gail Allard.

ALLARD: But what nailed me was the government said no government money for banks.

FRAYER: And the government has gone back on that now. It will be even harder for Spain to cut its spending now that it has to pay for this unexpected bank bailout, as well, not to mention the message it sends to citizens enduring pay cuts and tax hikes.

(SOUNDBITE OF POLITICAL PROTEST)

FRAYER: Felix Garcia is a public schoolteacher who's been on strike.

FELIX GARCIA: They have money for some things, for example, for the banks, but they don't have money for education.

FRAYER: A bank bailout is a tough sell to the public, but Spanish banks are also inextricably linked with the government because the banks own the bulk of Spanish treasury bonds. Spain may not be able to afford to bail out all its banks, but it also can't afford not to try. For NPR News, I'm Lauren Frayer in Madrid.

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