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Solvency is still the issue for Spanish banks

Lenient treatment of property assets acquired in debt-for-equity swaps shows regulators are still worried by systemic vulnerabilities.

The chief executive of one of the biggest Spanish banks tries to convince Euromoney that his country’s economy is not in quite the mess often presented outside.

The economy is more innovative and diversified than it is given credit for and is now benefiting from big improvements in infrastructure and human capital that allowed it to hold its share of world export markets even as its labour costs caught up with core Europe over the past nine years. And the economy is more flexible than it is given credit for, the chief executive says – just look at how quickly Spanish companies have been firing people.

Indeed. Spanish unemployment was recorded at an official rate of 25% in 1994. It declined to a low of 8% in the first half of 2007, where the Spanish bank chief executive suggests it amounted to full employment. In the seven quarters to April 2009 it had risen to 17.5%, and with the construction and property development sector in huge retreat economists outside Spain expect unemployment to reach 25% again quite soon.

It is a boom and bust that could only have happened on the periphery of the euro area.

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