Battered Spanish Economy Nears Tipping Point After watching Greece from afar, many Spaniards feel that they could be next in line for a costly bailout. Spain will have to pay $40 billion in interest this year alone. Unemployment tops 24 percent and is rising.

Battered Spanish Economy Nears Tipping Point

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Greece isn't the only cause of concern for the eurozone. Spain's borrowing costs hit record highs this week and European stock markets have slumped. Investors are worried Madrid can't afford to prop up its ailing banks, and that means it's looking ever more likely the country will join the ranks of Greece, Portugal and Ireland, and need some kind of bailout.

Lauren Frayer has that story from Madrid.

LAUREN FRAYER, BYLINE: A tourist in Madrid might wonder where the crisis is. Traffic is heavy and the tapas bars are packed.

But listen in on some of the conversations, and you'll hear that Spaniards are scared.

SERGIO GONZALES: I saw the news of Ireland and Greece. I never thought it could happen here. But during the last two weeks...

FRAYER: Spain looks headed for a bailout, says Sergio Gonzales, a 27-year-old geologist who works for free because he can't find a job. He just withdrew his meager savings from Bankia, the failing lender that Spain is struggling to rescue.

GONZALES: I have a box of coffee with my money in, in my home.


GONZALES: I think it's better because today the banks don't give anything to you.

FRAYER: Spain's economy has foundered for years, but major budget cuts didn't hit until just a few months ago. Retail sales dropped nearly 10 percent in April, year-on-year.

Shopkeepers like Mario Fernandez feel the pinch.

MARIO FERNANDEZ: We have less sales than three years ago, but this last month is going to be worse.

FRAYER: Unemployment now tops 24 percent and is rising. Spain is paying ever-higher interest rates on the money it borrows, because investors don't trust they'll get paid back. Madrid will have to pay $40 billion in interest payments this year alone.

JAVIER DIAZ-GIMÉNEZ: And that's money that's not spent on either paying public employees, or on public health or on public education.

FRAYER: Economist Javier Diaz-Giménez, at Spain's IESE Business School, says Spain is under pressure from Brussels to cut spending. But bills keep popping up: A bank bailout here, higher interest payments there. And those interest payments can rise only so far.

DIAZ-GIMÉNEZ: And eventually, it just becomes totally unmanageable because you have to dedicate an ever-increasing share of your public revenues to paying financing costs.

FRAYER: For Greece, Portugal and Ireland, the tipping point came when they had to pay seven percent interest on 10-year bonds. Spain brushed 6.7 percent this week - dangerously close.

A glimmer of hope came Wednesday, though, when the European Commission recommended that Europe's new emergency rescue fund be used to recapitalize banks.

ROLF CAMPOS: The possibility that this European fund can lend directly to banks would help Spain a big deal.

FRAYER: Economist Rolf Campos, also at IESE, says Spain has much lower government debt than Greece, Ireland or Portugal did just before their bailouts. The problem here is the banks weighed down by bad real estate loans that threaten to topple the whole economy. If Europe helped rescue the banks, Spain might be OK.

Except for one thing, Campos says.

CAMPOS: It seems that Germany won't accept this. So it's wishful thinking.

FRAYER: Germany doesn't want its contributions to the European rescue fund to disappear into Spanish banks that have had their share of mismanagement and scandal. This week, it came out that the parent company of Bankia has promised one of its executives a pension totaling seventeen-and-a-half million dollars while taxpayers bail out his bank.

Even if Spanish leaders were to convince Germany to allow them to tap the European rescue fund, it could be months before cash starts flowing. And three-tenths of a percentage point separate Spain from Greece's fate. There isn't much time.

Back at the sidewalk cafe, I ask Gonzales, the geologist who keeps his savings in a coffee can, what his future might bring.

GONZALES: I'm thinking about go away to South America, some country like that.

FRAYER: Like many young professionals forced to go abroad for work, Gonzales might not stick around to watch Spain collapse or even recover.

For NPR News, I'm Lauren Frayer in Madrid.

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