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Can Spain save the economy? - 7 October 2008

As the world’s stock markets are tumbling around the ears of the bankers who have revelled in the past ten years of prosperity in the UK economy, and we discover the extent of the influence of the Icelandic banks on the rest of the world, a possible band-aid for the liquidity of the Spanish economy has been found stuffed in a shoebox at the back of a wardrobe.

The Spanish government estimates that some 108 million of the highest-denomination currency in circulation is held by private citizens, and are searching for a way to pump this extra liquidity back into the banking system. Blaming the phenomenon on a traditional mistrust of the banking system (who’s laughing at their backward ways now?) and a ‘relaxed’ attitude to tax laws, Spanish authorities think their citizens have up to €54 billion stashed away in €500 notes and circulating in the country, outside of the banking economy.

It has long been a known (but definitely illegal) practice for property deals to be concluded in a combination of transparent bank transfers, topped up with a healthy dose of cash to avoid declaring the true value of the property and attracting heavy tax penalties. Most often, this is paid in the famed €500 notes, known colloquially as ‘Bin Ladens’ due to their scarcity.

The most obvious method of getting Spaniards to pay these notes into their accounts, thus releasing liquidity into the banking system, has already been ruled out. Finance minister Pedro Solbes has ruled out a tax amnesty on those paying the cash into their banks due to opposition from those trying to stamp out the black economy.

Spain is said to have one of the biggest black economies in Europe, and according to the Guardian, it accounts for 20 – 23 per cent of GDP. Fiscal authorities in Spain are reported to be looking in to 12,000 transactions that have involved the use of €500 notes in recent years.

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