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Spain seen going slow on reforms

A planned merger has stalled between two weak savings banks in Galicia, in northwestern Spain, illustrating the reluctance of the Spanish government to take a firmer hand to its financial problems.

business Updated: May 04, 2010 21:34 IST

A planned merger has stalled between two weak savings banks in Galicia, in northwestern Spain, illustrating the reluctance of the Spanish government to take a firmer hand to its financial problems.

The longer consolidation is delayed among the banks, which are saddled with losses on loans to the construction industry, the more expensive it may be to deal with them.

What’s more, regional banks are deteriorating not just in Galicia, but throughout the country.

Investors and analysts say the lack of progress in tackling the banking issue underscores the Spanish government’s shortcomings in addressing its broader problem: crushing fiscal deficits arising from high unemployment and a persistent recession.

Spain risks falling into the same trap as Greece, these investors say, unless it takes more forceful action. It could find itself unable to raise money on the private markets at acceptable interest rates — even though its government debt burden, as a share of the overall economy, is only half what Greece carries.

“Any further wavering could lead to a much more critical situation,” said Xavier Vives, an economics and finance professor at the IESE business school of the University of Navarra.