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Regulation and Compliance > State Regulation

Spanish Austerity Measures Lead to State of Emergency

By Marlene Y. Satter

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The wildcat air traffic controller strike in the wake of Friday’s approval of strong austerity measures in Spain led to a declaration of a state of emergency. One of the measures approved was the sale of a 49% stake in Aena, the state-owned airport authority, to raise 9 billion euros; another was regulation of the controllers’ working hours, and controllers held a sickout in protest. The military took over the country’s major airports, and accounts of controllers being compelled to return to work at gunpoint were reported, although such accounts were denied by Spain's Deputy Prime Minister Alfredo Perez Rubalcaba.

The massive disruption over one of Spain’s busiest holiday weekends, stranding about a quarter of a million people, caused losses to the tourism industry estimated in one Reuters account to total 400 million euros. That industry makes up approximately 11% of Spain’s GDP. Airlines were estimated to have lost around 100 million euros.

Determined not to allow such an event to occur again, Prime Minister Jose Luis Rodriguez Zapatero announced that he would extend the state of emergency, the first since Franco’s death in 1975, for two months so that military personnel could be trained to take over the jobs of any controllers who lose their jobs or face charges over their actions. Jose Blanco, public works minister, said during the weekend that Aena has begun 440 disciplinary proceedings against those who walked out. And Rupalcaba said, “The world has to understand this will not happen again. Very drastic measures must be taken and we'll do everything that can be done.”

Market reaction to the weekend’s events punished Spain’s bonds, increasing the risk premium, and the IBEX (IBEX) stock index dropped 1%.

Meanwhile, reports of Austrian online gaming company Bwin (BWIN.VI) considering purchasing a stake in the Spanish state lottery were denied by that company. The Spanish newspaper El Mundo had reported on Sunday that Bwin was among companies considering the purchase—another of

Madrid’s newly approved austerity measures is the sale of a 30% stake in its lottery—but on Monday a spokesman for Bwin refuted the story. “Bwin is focusing on the online business and as a result has no interest. . . .” Madrid expects to raise 5 billion euros from that sale, which could involve a listing on the stock market.

Another possible complication for Spain’s plans to strengthen its financial situation is the loss of J.C. Flowers, a U.S. private equity firm, as a potential investor in Banca Civica. Spanish savings banks, or cajas, are perceived as in need of capital after that country’s severe recession, and Flowers had pledged in July in a nonbinding agreement to purchase bonds in Banca Civica.

However, on Monday Christopher Flowers, head of the firm, told the Financial Times that the firm’s interest in the deal had waned pending a restoration of confidence in the Spanish economy. According to a Reuters report, Flowers told FT that any investor would have to be “pretty brave” to invest in either Spain or Ireland in the current climate. Flowers also said he was unlikely to make any investments in a country whose sovereign debt is currently considered at risk. However, he added, an investment in Banca Civica would make sense after it and CajaSol, another savings bank, complete merger talks.

The original nonbinding pledge in July would have been for 450 million euros in convertible bonds in Banca Civica, and was made in the wake of a failed stress test and an order to raise capital. Flowers said, “[The pledge] has never been superseded by a formal agreement. Consequently we have not made any investment in Spain and are not committed to do so.”

Spanish bank stocks were down on Monday; Santander (SAN.MC) and BBVA (BBVA.MC) had both sunk about 2.5%, and smaller banks Banesto (BTO.MC) and Banco Popular (POP.MC), among others, also lost ground.

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