The Bank of Spain should immediately use its independent authority to shut down both insolvent and severely undercapitalized Spanish savings banks (cajas). Even large institutions like Bancaja and Caja Madrid, if their true condition is sufficiently weak, should be closed.… stops relying on selective disclosure of unrealistic “stress test” scenarios for its banks. Such stress tests have been thoroughly rejected by the financial markets. Mortgage losses at cajas, and likely losses to creditors of failed cajas, should be recognized and publicized, and portfolio information must be disclosed in detail for both healthy and unhealthy banks.
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Spain boasts many globally successful enterprises, as well as substantial capabilities to export and to attract foreign capital. If labor and pension reforms are enacted, Spain’s competitiveness will be restored, its current account deficit will reverse, and Spain will have no trouble maintaining a sustainable foreign balance.
(4) Spain should persevere with long run budget consolidation mainly through spending reform. Spain should resist tax increases or draconian additional short-term spending cuts, which are counterproductive for restoring growth. As Greece’s unfortunate experience has shown, maintaining sovereign creditworthiness is challenging without positive short-term growth prospects. Spending reforms that focus on long-run declines in spending as a share of GDP are desirable, but short-run fiscal austerity programs that drive more people out of work or increase the tax burdens on firms or consumers will not restore international investors’ confidence.
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